Good tax news for a couple who were underwater on their mortgage:
A payment they received from the mortgage company isn’t ordinary income, the Tax Court says. The couple took out a nonrecourse mortgage to buy a second home. After experiencing financial difficulties, they entered into a deed in lieu of foreclosure with the mortgagor, which forgave the debt in exchange for them signing over the deed. Additionally, they got a cash payment from the realty company for vacating the home by a certain date and leaving it in good condition. The Court struck down IRS’s claim that the payment was ordinary income. Instead, it’s included in gross proceeds when figuring gain or loss on the realty transfer (Bobo, TC Summ. Op. 2016-74).