Warning for some who decide to walk away and the tax implication it could pose long t

[tammygirl1]

Husband and I decided we would let our house go last Dec since he was laid off and we were more than 100k underwater. We might have been able to swing payments but would have to dig into emergency fund if he didnt get a job. I did researched the tax implications for the next year but that only factored in if my hubby was still on unemployment. It seemed like we would benefit from letting it go. But this last week I started plugging in variables on him getting a job making what he made before and my merit increases they started back this year and found that our adjusted gross way more due to not being able to take the itemized deductions (38k in my case). When I started plugging in the potentials of hubby making even 16k more than unemployment, we would be taking home a thousand + less per month than our current state! Needless to say, we can't afford to let house go. I called BofA today and they say they will do everything they can to keep us in house for mod but i not enthusiastic of that outcome. We are now over 11k behind....We have to send bank statements which have our saved mort payments and emergengy fund and factor in my income it won't fly I figure....Anyway, my post is to really research long term implications from walking away especially if income is still decent.

[justbroke]

You're in Bankruptcy in an active Chapter 13? If so, you would be discharging the debt, so there would be not tax consequence. This is because you are probably considered insolvent... even without the extra income. Now, discharging the debt in Bankruptcy makes completing IRS Form 982 that much easier, as you only need to check the bankruptcy discharge box.

If you are behind in a Chapter 13 and underwater, I don't see any reason to keep it anyhow... unless it's like paying "rent". However, you're behind and that's a "real" problem. Does the Trustee know that you haven't made $11K in payments and have pocketed the money? Does your bankruptcy attorney know the situation?

[tammygirl1]

Hi Justbroke.
We are in an active ch13. Our attorney knows we were letting it go and he was waiting for the stay to be lifted. They never mentioned any ramifications (although i realize thats my responsibility to know). The trustee doesn't know anything yet. We saved about about 3k out of the 11k not made in mort payments. The rest was from emergency savings we had been saving since we started the plan which is a decent buffer. Our attorney doesn't know yet that may want to keep the house but that email will go out to discuss it all.
So when I calculated out our take home if he was to get same paying job (50k) + calculate my 3% merit increase keeping our house it would be around 12k per month. If we were to let it go and only qualify for standard deductions our take home would be 9k. This is assuming we take appropriate amount of taxes out each month. Maybe I am calculating wrong....but was using the tiered 10%,15%, and 25% tax brackets. Research also indicates some of the tiers will collapse meaning even higher taxes the following year.....
We could rent similar place for about 2100-2200 and our mortgage is 2800. It has to house a family of 5 so we can't get much smaller for now.

Edited:take home 10 vs 7.5k not 12/9......was looking at wrong figures on spreadsheet I worked up...either way...a huge difference

[justbroke]

Okay, I see where you are going. I was just trying to make sure that you weren't going to be in jeopardy with the Trustee. The only problem with keeping a home in a Chapter 13 is that you won't discharge the debt. You'd be stuck with the home later -- even being $100K underwater -- and will be liable. That's my only issue with where I think you're heading; that is, keeping the home.

I think that if you already got into trouble with the home, have $11K in arrears, and may be having issues keeping up with payments, you should really be considering "not" keeping it. I do understand the issue with needing 5 bedroom homes and the costs. This is probably why the Trustee didn't squawk about my $2,000/month rental when I filed Chapter 13 (it was $900/mo over the allowance).

[LadyInTheRed]

You seem to be saying you will take a $2,500 per month income tax hit if you don't have mortgage interest and property tax deductions? Are you sure your calculations are correct? I'd have a CPA run the numbers to make sure it is done correctly before making a decision.

Have you also included maintenance expenses?

[tammygirl1]

ladyinRed, you are right, I need to take my scenarios to a CPA and see what they say. I didn't factor in maintenance which I should do. House is only 7 years old but things are starting to cost out of pocket lately.

[8forme]

We are giving up our house as we are moving across country. We can only take the mortgage interest deduction because our adjusted gross income is too high for all other deductions....it phases them out. We have 8 children and only get a $3000 TOTAL deduction for them. We will need to pay in over $700/month OVER what we pay now just for federal taxes. We have not figured the state yet.....