Although the federal government made a small concession for primary homeowners in crisis this year through tax exemptions on foreclosure losses, the average Joe who dipped into real estate investing and is now going for bankruptcy or just foreclosure will be in a world of hurt.

So many middle class families and individuals got into buying second homes or condos for vacation and investment during the real estate boom and are now victims of the mortgage crisis.  They are finding it impossible to keep - even with renters.  A huge ARM loan payment increase isn't going to be possible to meet in most cases.  If it's the home you live in, foreclosure is the only way out, sad but necessary in some cases.

With passing the Mortgage Forgiveness Debt Relief Act, which is effective from Jan. 1, 2007, through Dec. 31, 2009, a homeowner does not have to pay tax on debt forgiven by a lender (the deficiency balance) - if the loan is backed by the property the homeowner lives in.

Unfortunately, if you bought a vacation condo when you really couldn't afford it, and now you let it go, the difference between what the bank foreclosure sale brings and how much you borrowed is considered INCOME, and you are responsible for paying income taxes on it in 2007. 

The New York Times quotes a bankruptcy lawyer in Stockton, California who says that most attorneys, even those familiar with bankruptcy, aren't considering this when they are advising their clients to get out from under the debt.  For instance, say an investor borrowed $200,000 on an oceanfront condo in Myrtle Beach.  He qualified for the mortgage even though his income is nowhere near enough to support the true payments on such a loan.  The interest rate jumped up and now the payments are such that even our summertime rentals can't touch them.

The buyer now goes into foreclosure, and the bank gets $150,000 at an auction. That unfortunate investor-who-shouldn't-have-been is going to be paying income taxes on the $50,000 difference! Even bankruptcy doesn't help this nightmare.

The National Association of Realtors reports about 7.5 million vacation homes in the US, and says that those numbers rose 18 percent from 2002 to 2007.  The problem is compounded when those second homes go to foreclosure, and it lowers the value of all the other comparables...whether they are primary or vacation homes.  Condo sales will drop throughout the development with numerous foreclosures, and then even those living there can't sell with a profit.

In places such as Las Vegas, 60 percent of the foreclosures in 2007 were from investment real estate.  They report that so far this year, 60 percent of them are PRIMARY homeowners now...brought low by falling values from the investors bowing out.

Some attornies are hoping that talking the banks into signing an agreement that states "foreclosure fully satisfies all obligations under the loan" will prevent the IRS from treating the forgiven amount as income, but so far it's untested and there are no court decisions to decide until they try it.

If you are considering an investment in a foreclosure in Myrtle Beach, or any kind of Myrtle Beach real estate, the Myrtle Beach Condo Store offers expert help to locate the best property for your needs.  From 1031 Exchange to luxury homes on the golf course, we can assist.

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