I have second on my house for a pool, and unfortunately i havent been able to make payments on it. I have either and attorney or bill collector telling me that if they charge off this loan he is going to report this to the IRS as an unearned income. Can this be done?
2 Answers from Attorneys
Absolutely and if you don't file for bankruptcy, the IRS will consider all of the money charged off as income that you would be required to pay tax on.
I assume that in talking of your house, you mean your principal residence. Qualified principal residence indebtedness that is forgiven does not result in a 1099-C (a report of income received in the form of debt forgiveness). This exception was created by the Mortgage Forgiveness Debt Relief Act of 2007 and applies to most homeowners and most debts. IRS Publication 4681 may provide good answers to all your questions about this non-taxability of forgiven debt:
I hope you will find that the bill collector is simply trying to initimidate you into making payment arrangements, rather than allowing his client - the lender - to write off the debt.
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