Chapter 7 - EXHIBIT 7D • TWO FORECLOSURE TAX TRAPS

• Jurisdiction: Colorado

EXHIBIT 7D • TWO FORECLOSURE TAX TRAPS

TWO FORECLOSURE TAX TRAPS

• • CCH Explanation

.333 Foreclosure by mortgagee or voluntary conveyance by mortgagor.— The Supreme Court has held that, where the taxpayer forecloses on mortgage loans and purchases the properties at foreclosure sales by bidding for the properties the full amount of the mortgage plus accrued unpaid interest, the taxpayer realizes taxable income in the amount of the accrued interest, even though the fair market value was less than the bid price. It stated that there is constructive payment by the mortgagor of the accrued interest so bid in, even if the mortgagor is on the case basis. See ¶1416.75. The lower courts have applied the same rule to voluntary conveyances by the mortgagor in consideration for the cancellation of principal and interest of the mortgage to the extent that the value of the property exceeds the mortgage principal, on in the absence of evidence of the value of the property. But there is no interest income in the case of such voluntary conveyance if the property is worth less than the principal of the loan. See the cases at .3386 and following, below, and ¶670.32, 670.326 and 4645K.01.—CCH

• • CCH Explanation

.32 Income realized by mortgagor on foreclosure of mortgage.— Foreclosure of a mortgage results in income to the mortgagor to the extent that the mortgage indebtedness exceeds his adjusted basis of the property. See Helvering v. Hammel, (Sup. Ct.) 41-1 USTC ¶9169, 311 U.S. 504, and Electro-Chemical Co. v. Com., (Sup. Ct.) 41-1 USTC ¶9170, 311 U.S. 513. The transfer by the mortgagor of his equity in the property for release of liability is a sale or exchange. Therefore, taxability of the gain is based on the same principles that apply in the case of sales or exchanges generally, rather than on the principle...