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Making Cents: Tricks When You're Upside-Down

May 12, 1996

If you're facing foreclosure because you can't handle monthly payments or because your home is no longer worth as much as the loan amount, try to negotiate a deal that minimizes credit and tax problems. A lender who wants to avoid foreclosure might reduce your mortgage to the current value--a "cram-down"--but that means it has forgiven debt, which the IRS regards as income. This may not be an immediate problem, but you can't escape taxes on it forever. You can avoid tax liability by changing loan terms rather than the loan amount.

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