A Different Way to Look at Debt

There’s often conversations about debt being good or bad. But really, debt is just debt. It has no emotions and you’re the person who’s in control of it.

I read a comment recently that rephrased this good vs. evil debt mentality in the most perfect way: debt is not good or bad – it is profitable or unprofitable.

Student Loan Debt
I’ve personally never had any student loan debt so I don’t know what it feels like it to have it hovering over my head. But going through the theory of profitable vs. unprofitable debt student loans could fall into either.

Your student loan debt is profitable if:

    Your degree helps you land a job that pays higher than you could get without a degree. (Because we know that not all degrees are going to score you a high paying job.)
    You use your student loans to pay for tuition and related expenses.

If you’ve used your student loan debt to finance a lifestyle that you shouldn’t be living right now then your student debts are not profitable.

Use your student loans to advance your career, earn decent money, and only use them to pay for necessary college expenses and you’re looking at profitable debt.

Consumer Debt

Consumer debt is the absolute most unprofitable debt that you can have. If you’re using credit cards and other personal loans to finance your life you’re living beyond your means and are setting yourself up for financial disaster.

Stay away from this type of debt.

Mortgage Debt

Mortgage debt is a big toss-up. If you plan on living in one place all of your life, purchasing a house may save you money in the long run over renting.

However, if you’re not staying in one place forever and at some point need to sell your home you could lose a lot of money if housing prices drop. OR you could make a small profit when it came time to sell.

Mortgage debt is one that comes down to individual circumstances although I would argue that it definitely leans more toward the unprofitable side of the equation.

Investments

Debt becomes the most useful when it comes to investing. Many investors have built their wealth by leveraging debt and purchasing real estate.

Other ways to use debt to its advantage is when you’re investing in yourself in a way that produces tangible results or using that money to grow your business.

Bottom line: debt isn’t good or evil. When you intentionally use it to its advantage it can be a tool for building wealth. If you use it in an irresponsible way it can be a path to financial disaster.

source: everybodylovesyourmoney.com

California Homeowners Finally Get Tax Relief for Mortgage Debt Forgiven in 2013

It took a lot longer than expected, but California homeowners who received mortgage debt relief last year won’t be on the hook for state taxes tied to so-called phantom income.

California Assembly Bill 1393, introduced by Assembly member Henry T. Perea (D-Fresno), extends tax relief on the forgiveness of mortgage debt by conforming California law to federal law.

The California State Senate approved the bill on June 30th, passing it with an overwhelming 33-0 vote, which was later followed by a 68-0 vote by the Assembly last Thursday.

Thanks to this bill, which should be signed into law by Governor Jerry Brown shortly, California homeowners who had certain debt canceled or forgiven last year will be able to amend their taxes and get refunds.




Early last year, the Mortgage Forgiveness Debt Relief Act of 2007 was given a one-year extension, meaning those who were foreclosed on or sold short didn’t have to worry about federal taxes on gains they never actually realized.

Typically, mortgage debt that is forgiven by a bank or lender must be included as ordinary income on your tax return, but the Mortgage Forgiveness Debt Relief Act allows borrowers to exclude certain canceled debt tied to a principal residence.

Additionally, debt reduced through mortgage restructuring such as a loan modification (principal reduction) also qualifies for tax relief.

But while federal taxes may have been avoided last year, some California homeowners were still subjected to state taxes in certain cases.

It’s unclear how many homeowners actually got taxed thanks to anti-deficiency laws already in place that protected many of those who sold their homes for less than what they were worth, but the state estimates taxpayers will save roughly $39 million.

The bill also protects homeowners from penalties regardless of whether they reported the discharged debt on their 2013 tax return.

Unfortunately, this bill will only cover transactions that occurred in 2013, meaning uncertainty still looms for mortgage debt forgiven this year. Another extension will likely be necessary…

The same goes for federal tax relief, which also hangs in the balance as politicians work on a tax extenders package.

Of course, much of the mortgage relief has already been doled out, with short sales, foreclosures, and loan mods all dropping in numbers considerably as home prices continue to rise.

Still, the passage of this bill should give homeowners a lot more confidence to move forward with such an action without fear of being on the hook for state taxes.

However, even if the discharged debt isn’t taxable, a taxpayer may still have to deal with taxes if there was a gain from the sale or foreclosure of the property.

As always, be sure to consult with a lawyer, CPA, and/or tax preparer to ensure you understand the implications of this bill and other related laws.  It’s certainly complicated, so enlisting a professional is probably not a bad idea.

source: thetruthaboutmortgage.com