About 11 million homeowners owe more than their homes are worth, according to real estate data firm CoreLogic, and while taxes may not be the first thing they think about in deciding what to do, all the various options have tax consequences.
Until the end of this year, at least, there is a tax break for homeowners who negotiate debt reduction with their lenders.
Some of these "underwater" owners may qualify for principal reduction through the massive mortgage foreclosure settlement announced in February. Others may pursue short sales, in which the home is sold for less than the bank is owed, or wind up in foreclosure.
But those whose lenders cancel their debt would ordinarily face the tax man, because cancellation of debt, including mortgage reduction, is generally taxable. That means if you get your mortgage reduced by $100,000 and you're in the 28 percent tax bracket, you'd owe $28,000 in federal taxes on the "income" you received when your debt was forgiven.
Typically, the only way to avoid those taxes is to declare bankruptcy or to claim insolvency, which does not require a bankruptcy filing but still requires that your debts outweigh your assets. Being foreclosed in a state like California, which has "non-recourse" rules that prohibit lenders from coming after you for extra cash after they've taken your house, also exempts one from taxes.
A special federal tax break to help ailing homeowners, put in place in 2007, allows them to exclude up to $2 million in forgiven mortgage debt from their income. To qualify, that debt has to be for your primary home — sorry, no vacation homes or investment properties.
With the tax break slated to expire in nine months, if you're currently sinking under the weight of your home, there's a reason to move quickly. No one can accurately foresee whether the provision will be renewed by Congress, and dealing with underwater real estate takes time.
"These problems are now winding their way through the final stages, and that's where the tax part comes up," says Larry McKoy, a certified public accountant and partner at Dixon Hughes Goodman, in Glen Allen, Virginia.
An embargo on flights to Fiji has been lifted amid severe flooding from Tropical Cyclone Daphne that has left at least four people dead and hundreds seeking shelter in evacuation centers.
Thousands of tourists were stranded at resorts, hotels and at Nadi International Airport after the storm caused extensive flooding in the South Pacific nation.
The storm has lashed Fiji's largest and most populous island, Viti Levu, with strong winds and heavy rain.
The Fiji Meteorological Service said Monday that it was maintaining its severe flood warning for "all major rivers, streams and low lying areas" on the island.
Many roads are closed and water and power supplies have been cut in some areas. The Fijian government has declared a state of natural disaster for the Western Division of Fiji.