Bank of America has been forgiving second mortgage loans for primary residences after it entered into a national settlement related to its mortgage foreclosure abuses. BOA has been making unsolicited offers to certain homeowners to release their second mortgage and cancel the indebtedness.
Several of my own clients report receiving notices that their BOA mortgage is being cancelled. In addition to release of mortgage, the bank cancels the underlying promissory note. The bank will not seek a “deficiency judgment. “ Some of these mortgages exceed $200,000.
One of these clients asked me a tax question related to his release from Bank of America. This client had obtained a second mortgage from BOA after he purchased a home as his primary residence. The client understands that there is no imputed income from a bank foreclosure on a primary residence. He wants to know if he will incur income tax on the amount of the unsolicited mortgage release if there is no foreclosure.
My understanding is that the protection from imputed income tax relates to a release of debt on one’s primary residence for any reason. In most cases a debt release will occur in conjunction with a foreclosure. The law does not require there be a foreclosure, and the protection from tax is from a release of debt for any reason. Therefore, I do not think that BOA’s unsolicited second mortgage releases will cause homeowners to recognize additional income.