Mortgage Bad Debt
Mortgages which may become noncollectable can be written off as a bad debt as well. However, they fall under a slightly different set of rules. As stated above, they can only be written off against tax capital, or income, but they are limited to a deduction of $3,000 per year. Any loss above that can be carried over to following years at the same amount. Thus a $60,000 mortgage bad debt will take 20 years to write off. Most owners of junior (2nd, 3rd, etc.) fall into this when the 1st mortgage forecloses with no equity remaining to pay on the junior liens.
There is one option available for mortgages not available for business debt - donation. The difference is that a valuation of $10,000 can be taken without an appraisal. An appraisal may be able to increase the value to more and must be based on other similar mortgages that actually sold, but generally is less than the face value. The real difference is that as a donation the amount of deduction is limited to up to 50% of Adjusted Gross Income per year with carryovers taken over the next 5 years
. This is because the deduction is now classified as a donation instead of a bad debt write off and uses Schedule A instead of Schedule D
. This can significantly increase current year's tax reductions compared to the simple write off. The caveat is that it must be completed PRIOR to the date of final foreclosure and loss. The process is simple, but finding a charity to cooperate is difficult since there will be no cash value as soon as the 1st mortgage forecloses.
Read more about this topic: Bad Debt
Famous quotes containing the words mortgage, bad and/or debt:
“Loosened from the minor’s tether;
Free to mortgage or to sell,
Wild as wind, and light as feather
Bid the slaves of thrift farewell.”
—Samuel Johnson (1709–1784)
“Shakespeare had no tutors but nature and genius. He caught his faults from the bad taste of his contemporaries. In an age still less civilized Shakespeare might have been wilder, but would not have been vulgar.”
—Horace Walpole (1717–1797)
“I have been told, that in some public discourses of mine my reverence for the intellect has made me unjustly cold to the personal relations. But now I almost shrink at the remembrance of such disparaging words. For persons are love’s world, and the coldest philosopher cannot recount the debt of the young soul wandering here in nature to the power of love, without being tempted to unsay, as treasonable to nature, aught derogatory to the social instincts.”
—Ralph Waldo Emerson (1803–1882)