Monday, October 15, 2012

Strategic Default Best Practices: Consider The Tax Implications

In this article we will explore how to properly analyze a strategic default in connection with any potential tax liability. This is the first article in our new series: Strategic Default Best Practices

Many homeowners who have strategically defaulted now recognize it can several years for a lender to collect a debt or to foreclose on a property. In fact, many homeowners continue to live in and/or rent their property while strategically defaulting.

It stands to reason that a homeowner who strategically defaults intends to be in a better financial position.  The homeowner has not made mortgage payments for several years while living in and/or while renting part or all their property. What a paradox?  By not making mortgage payments a homeowner can potentially improve their financial profile. In fact a properly implemented strategic default can create a better financial future for you, your family, or your business. Keep in mind that maintaining a good credit score is not possible when implementing a strategic default. Thus a “credit score" is not an important financial consideration during a strategic default. The primary goals of a strategic default are to protect and increase cash flow, to protect and increase savings, and to protect and preserve wealth/assets; all with the aim of reducing or eliminating the total debt and/or any tax. 

There is no free ride when it comes to not paying a debt. In our book, Strategic Default: How To Create A Better Financial Future for You, Your Family, or Your Business we outlined the principle "Debt Is Similar to the Physics Principle of Matter and Energy". There is a principle in physics that matter and energy can neither be created nor destroyed; they can only be rearranged. Debt follows the same lines. Once debt is created it cannot be destroyed unless it is restructured and resolved. Therefore, if a debt is not settled or resolved, then the debt will remain as long as the creditors are legally allowed to chase you for it. For example, a money judgment can last for 20 years in New York. Original lenders and 3rd party debt collectors will always attempt to collect unpaid debts plus interest and penalties. The tax authorities (IRS and states) will always attempt to collect taxes on forgiven debt and/or rental income. Keep in mind that the Mortgage Forgiveness Debt Relief Act ("MFDRA") provides a tax exemption for forgiven debt in certain circumstances. However, the MFDRA is set to expire December 31, 2012 unless the federal government renews the law.