You provide interesting financial information but leave out critical information such as what type of loan each of these mortgages are, recourse or nonrecourse. You also leave out the state in which the condo is located. Beyond that one may need to know the adjusted income tax basis in the home.

Rather than attempting to answer your question on this website, it is much better if you seek the advice of a competent and knowledgeable attorney with experience in these matters. Your suggestion could take a non-recourse loan and make it recourse. While I do not mean to imply that such action may not be appropriate if short sale or foreclosure could harm your chances for another loan in a period when you need one, I do mean to imply you should explore your options before making any decision.

Please do not place your tax concerns before your legal liability and financial viability concerns. In the tax world we call that “allowing the tail to wag the dog.” Tax concerns are important but other concerns should normally come first.

That is the subject of an article soon to be published by RMD; it has been written and submitted. It should appear shortly.

In brief, heirs can have income tax consequences as to a foreclosed home received from through will, trust, etc. With some tax planning, some or all of the resulting income tax liability can be avoided. However, the artilc will cover these points.

Thank you for the added clarification!

In regards to the question of timeframe, HUD provides guidelines that dictate a “grace period” for repayment of a loan after a maturity event has occured. The initial grace period is 6 months long and can be extended in 3 month intervals for a maximum of a 12 month grace period after the maturity event occured. After the 12 month period, lenders will iniate foreclosure actions/proceedings to recover the debt.

From your initial article, would you be able to comment as to whether or not the estate/heir would have tax liablility in an instance where the 12 month grace period has expired, the lender foreclosed, and the lender received less than the original HECM debt balance?

This is a correction to the comment at 12:15 am on June 16th above.

Mr. John P.,

In my comment referenced above I left out the word “non-recourse” from the second sentence of the first paragraph. Also the word “sold” in that sentence should be “trnsferred.” That sentence should now read as follows:

The biggest exception to that rule is cancellation of non-recourse debt where the underlying security is transferred as explained in the article.

I apologize for any confusion.