> Not so fast.
Not so fast yourself! :-)
> As for taxable income, it depends on how much equity you
> put into the house, how long you lived there, and other details. The
> IRS
> explains:
>
> http://www.irs.gov/newsroom/article/0,,id=174034,00.html
>
> "The amount on line 6 is your gain from the foreclosure of your home.
> If
> you have owned and used the home as your principal residence for
> periods
> totaling at least two years during the five year period ending on the
> date
> of the foreclosure, you may exclude up to $250,000 (up to $500,000 for
> married couples filing a joint return) from income."
Be extra careful with this shit: Line 6 in that example is how to figure the *gain*; this is an ADDITIONAL potential problem. The income I'm talking about is Line 3: it does *not* figure into a gain/loss calculation, it's simply "ordinary income" ... the Line 6 example is something that could come into play if, for instance, you used your house as an ATM[*]. The example I was using ($300k foreclosed at $150k in Merced) would not show a gain at all; but it would have (likely taxable) income.
> Finally, owing 30K and paying that off after five years might still
> better
> than paying for 300K on a property only worth 150K.
Maybe, though it seems unlikely. If I were in that position, I'd try to refinance into an interest-only loan (to save on cash-flow) that would be in the neighborhood of $1300/mo. Financing $30k for 5 years will likely cost you $600/mo (if you can get it! It seems unlikley if you walk away from a mortgage that you'll be getting a personal loan anytime soon), so can you go find equivalent rental housing for $700/mo? What if the financing is more like $800?
Not in my neck of the woods, that's for sure.
---
I think my original statement stands: walking away from a mortgage is not something to take lightly. The link you sent points out an additional interesting item: there are some certain situations where you can get the tax-on-forgiven-debt excused; it's not common, and it takes professional help. If you're in this situation, get the best advice you can on the subject, which won't be coming from lbo-talk :-)
/jordan
[*] Imagine buying a house for $300k and as it rose over 15 years, refinancing until you owe $1M. Then lose your job and get foreclosed at $900k. You'll have $100k of ordinary income (from the debt forgiveness) *and* $600k of gain ($300k basis, "sold" for $900k); you can exclude $250k of it and still pay capital gains tax on $350k and you're looking at probably $150k of taxes.