Some question about Us Bankruptcy Court

Edwards Finance > Bankruptcy

Q. (A) and (B) were married, bought their home 12 years ago, and got divorced 2 years ago. In the property settlement, (A) got the house and (B) got a balloon second mortgage for $40,000. Earlier this year (A) filed a bankruptcy and gave (B) (through the bankruptcy trustee) a deed in lieu of foreclosure. (B) sold the house at a fire sale, paid off the first mortgage, pocketed $38,000 on the second mortgage, and went to unsecured creditor status for the remaining $2000 -- got zilch. Arguments: (1) the $38,000 is not taxable to (B) since (B) got it in a divorce transaction; (2) the $38,000 is not taxable to (A) since (A) lost it in a bankruptcy transaction; (3) (B) is not responsible for the rollover on the net value of the house since (B) was no longer on the title. (4) (A) is not responsible for the rollover on the net value of the house since (A) lost the house in a bankruptcy proceeding. Can all of these be suitable with Us Bankruptcy Court?

A. The $38,000 is not taxable because it is part of the $40,000 plus the first loan which would be the basis for the purchase. It appears that B has a loss of $2,000 capital loss on the transaction. > (2) the $38,000 is not taxable to (A) since (A) lost > it in a bankruptcy transaction; The $38,000 has nothing to do with A's tax liability. A's liability is determines by the difference of the basis of the house and the sale price (first loan plus $40,000). Tax liabilities are not dischargable in bankruptcy unless they are more that three years old. > (3) (B) is not responsible for the rollover on the > net value of the house since (B) was no longer > on the title. True. House is not personal residence. > (4) (A) is not responsible for the rollover on the > net value of the house since (A) lost the house > in a bankruptcy proceeding. Not true. See above comments. > Question: Can all of these be suitable with Us Bankruptcy Court? It would be interesting to hear Midge, Hank and Jack's thoughts on this question.

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