A strange contradiction, making a problem then complaining about it…

At the Central Bank conference on distressed property markets yesterday there was an excellent line up of speakers, the event was launched by the Governor who said that ‘Household financial distress is at unprecedented levels in Ireland as can be seen, for example, from the extraordinary rates of arrears on the servicing even of mortgages secured on owner-occupied homes‘.

That line is the one that made headlines, it was designed (intentionally or not) to make a point which various regulators keep making – that banks are not dealing with this problem.

So all we get from this is that mortgage arrears have miraculously gone to ‘extraordinary levels’ somehow and somebody needs to fix that… The justified rage being that we pre-capitalized the banks (recapitalizing would have necessitated the capital being used first not held to the bitter end) to the tune of €64bn.

Matthew Elderfield said it in March of last year, ‘time to face up to reality’. This was echoed in a talk given to the …

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Is getting a debt writedown a gift? Would you have to pay tax on it?

The US model of ‘short sales’ has a hidden sting in it that often gets lost in the noise, namely that the reduction of your debt is often considered a gain and it needs to be reported on your IRS Form 1099 (as opposed to a W2 or 1040) which covers income outside of wages/salaries/gratuities.

Which means that if you sold your property (we’re assuming it is in negative equity) for a €50,000 loss and the bank write that off, that in effect you have a non deductible loss which you didn’t pay and therefore you pay the tax on it (their equivalent of capital gains).

Like the US, Irish investors can offset capital losses against capital gains, in the case of your own home this doesn’t apply. In the American example a write-down creates a tax liability, although not in every state (my home-state of California being an example). This was becoming such a problem that the IRS brought out two special tax codes called ‘The mortgage forgiveness debt relief act …

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