Famspear wrote:You don't realize "income" under the Federal income tax law when the amount of the loan proceeds equals the amount you are legally obligated to pay back. And if you let the bank take the house, you will realize income (for federal income tax purposes) equal to the excess, if any, of the amount realized on the disposition of the house over your basis in that house. Notice that I said "realized," not "recognized." Notice also that I said "income" without saying what kind of income.
I ask again, that you explain it. Whatever it is you're getting at, so far it's new to me. Tell us all about the difference between "realized and recognized income". You brought it up, now explain it! Or maybe someone else will?
we're all ears; lets hear whole thing out like a simple math sketch.And notice that I did not say whether you would incur a federal income tax.
so Tell Us! Fill in the Blanks...Let's suppose that this is a house you bought and used for investment (i.e., you never lived in the house yourself; you just rented it out to tenants). Let's suppose you bought the house with 100% financing. Original cost is equal to the amount you borrowed. Let's suppose that the house was always worth exactly the amount of the principal on the debt -- and you never paid down on the debt (except for the interest expense, which we'll just say you deducted as you paid it). Let's assume, as well, that the debt was what we call recourse debt (you had personal liability on the debt).
If the bank takes the house back at fair market value equal to the debt, you now have "realized" income. You may or may not have "recognized" income, and you may or may not have a federal tax liability. (Notice that I did not say what kind of income.)
I dare not Hazard a Guess... I'm sure you know the answer.Do you know why you have "realized" income here? And do you know what additional information you would need to tell how much? Do you know what additional information you would need to tell you whether the income is also "recognized" by you?
now change the facts. Assume that the debt is non-recourse (you have no personal liability). You now have realized a particular kind of income called a GAIN FROM THE DISPOSITION of an asset. Not only that, but you have "recognized" that gain. And you may even owe a tax (depending on other factors not given in the example).
We’d all like to know why it makes a diference between recourse and nonrecourse.
Remember, in all these situations, on the facts I gave you, the fair market value of the property and the principal of the debt were equal in amount. That is, there was an "even exchange" (in the sense in which I believe you use the term). I am telling you that YOU ARE RIGHT that [b/] there is an even exchange of value, and I am telling you that there is nevertheless SOME SORT OF INCOME being "realized" by YOU under the Internal Revenue Code in these fact patterns
“there is an even exchange of value, and I am telling you that there is nevertheless SOME SORT OF INCOME”...
Amazing. Prove it.
(though there may or may not be a tax, depending on information not yet provided).
Provide it and answer the question please!