Investors in second or multiple homes stand to be among the biggest losers from the housing downturn.   That’s because proposed mortgage bailout programs don’t address second homes and investment properties.  Many owners of multiple properties don’t realize that investments they thought would help them build long-term wealth may in fact leave them in bankruptcy and facing a sizeable tax debt.


Homeowners who borrowed against the value of their second home, or who financed the purchase of their second home and subsequent homes by pledging their primary home or other properties as security, may be liable for taxes on the difference in value should they sell any of their properties for a price less than the value owed on the mortgage.

Under the Mortgage Forgiveness Debt Relief Act, a homeowner doesn’t have to pay taxes on forgiven debt if the collateral behind the mortgage is owner-occupied.  That provision doesn’t apply to a growing number of homeowners renting out their second home or investment property.  Of some 7.5 million vacation homes, only about 10 percent are considered owner-occupied, according to the NATIONAL ASSOCIATION of REALTORS® (NAR).  Many of these homeowners borrowed against the ever-increasing (or so it seemed) value of these properties to finance improvements or to buy other properties.

There may be a way out for some, one bankruptcy lawyer counsels:  Get a lender to agree that foreclosure “fully satisfies all obligations under the loan.”  That might protect the seller from having to pay taxes on the forgiven debt – although one attorney said, “I sure don’t want to be the one litigating it” in court.

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