1099c

[JG EA]

I read TTB and figured out what I should do with the numbers, but because this is a hard subject for me, I entered the 1099 C into my program for some verification of the worksheet. The FMV was way above the forgiveness of debt and it was recourse. Anyway it just threw the whole amount of the debt on line 21! I was in a panic and called the company. Their answer was don't use the form on the software.

Verification. If the FMV is way over the debt forgiven in a recourse loan there should be nothing on line 21 right?

[JoshinNC]

Are you using Drake?

Had a similar issue the other day and haven't called Drake yet. FMV is 10 times the amount forgiven, but the software is kicking it to Line 21. I haven't called the client yet cause I know it shouldn't be taxable, but the software keeps putting it there. I was thinking that maybe I was missing something. I also did the worksheet in TTB it comes out no taxable discharge.

Rough example:

$30,000 discharged on 1st mortgage in short sale, house sold for $330,000 (assume this would be FMV since it sold for that)

None of $30,000 discharged is taxable because it is less than FMV, right?

[WhiteOleander]

There are two different things being addressed on the 1099C. Normally the t/p would receive a 1099A and a 1099C if a property is repo'd. But, if they repo and forgive debt all in the same year, the mortgage company can just send the 1099C for both.

So, the FMV is the sales price of the property. The t/p will have to provide you with the basis. They may have alot of extra to add to the purchase price to arrive at their basis. It should be shown on sch D. If it is a primary residence, Sec 121 can be used if there is a gain. If there is a loss, no loss claimed since it is a personal loss. If it was rental property, then you would follow the rules to show the sale of rental property.

The 1099C shows the cancellation of debt. In your example this is 30,000. It has nothing to do with what is reported in the FMV box. The company has computed the cancelled debt to be 30,000. So, you follow the rules to see if the cancelled debt would be taxable. Was it nonrecourse debt or not? Were they insolvent? There might be another way to get the debt nontaxable. Just have to do the research.

[JG EA]

There are two different things being addressed on the 1099C. Normally the t/p would receive a 1099A and a 1099C if a property is repo'd. But, if they repo and forgive debt all in the same year, the mortgage company can just send the 1099C for both.

So, the FMV is the sales price of the property. The t/p will have to provide you with the basis. They may have alot of extra to add to the purchase price to arrive at their basis. It should be shown on sch D. If it is a primary residence, Sec 121 can be used if there is a gain. If there is a loss, no loss claimed since it is a personal loss. If it was rental property, then you would follow the rules to show the sale of rental property.

The 1099C shows the cancellation of debt. In your example this is 30,000. It has nothing to do with what is reported in the FMV box. The company has computed the cancelled debt to be 30,000. So, you follow the rules to see if the cancelled debt would be taxable. Was it nonrecourse debt or not? Were they insolvent? There might be another way to get the debt nontaxable. Just have to do the research.

Well then I am not understanding. Notice this worksheet in TTB and from IRS pub.

Worksheet for Foreclosures and Repossessions
Part 1. Figure income from cancellation of debt. (Note: If not personally
liable for the debt, there is no income from cancellation of debt. Skip
Part 1 and go to Part 2.)
1) Enter the amount of debt canceled by the transfer
of property.......................................... ......................... 1)
2) Enter the fair market value of the transferred
property.......................................... ............................. 2)
3) Income from cancellation of debt.* Subtract line 2
from line 1. If less than zero, enter zero..................... 3)
Part 2. Figure gain or loss from foreclosure or repossession.
4) Enter the smaller of line 1 or line 2. Also include
any proceeds received from the foreclosure sale. (If
not personally liable for the debt, enter the amount
of debt canceled by the transfer of property.)............
5) Enter the adjusted basis of the transferred
property.......................................... ............................. 5)
6) Gain or loss from foreclosure or repossession.
Subtract line 5 from line 4........................................... 6)
* The income may not be taxable. See Canceled Debts, page 14-9.

Notice under cancellation of debt it says only if the debt is recourse there may be COD. If it is recourse and the FMV is higher then there is zero COD. Are you saying this is wrong or I/We are looking at it the wrong way. I would appreciate your help on this.

[JoshinNC]

I'm confused as well

The worksheet would lead me to believe that a house sold in a short sale for $300k with a mortgage balance of $330k ($30k in cancelled debt) would lead to no taxable income from the short sale because the cancelled debt is less than the property's FMV. But, Oleander's statements don't jive with this, if I'm reading it right.

Please advise.

[WhiteOleander]

Ok, I'm not at my office where my TTB is. but, I think that the worksheet is correct. However, line 1 is meant to be the outstanding debt on the property. That is actually the debt that is forgiven. So, then you take the FMV (or what they received to pay the debt down) from the outstanding debt to see if you have any income from the cancelled debt.

Example:

Line one would be 360,000. (debt you still owed)
line two would be 330,000. (amt they were able to satisfy by the sale)
Line 3 would be 30,000 INCOME from the "leftover" debt not satified.

[JoshinNC]

I'd like some other opinions

Ok, I'm not at my office where my TTB is. but, I think that the worksheet is correct. However, line 1 is meant to be the outstanding debt on the property. That is actually the debt that is forgiven. So, then you take the FMV (or what they received to pay the debt down) from the outstanding debt to see if you have any income from the cancelled debt.

Example:

Line one would be 360,000. (debt you still owed)
line two would be 330,000. (amt they were able to satisfy by the sale)
Line 3 would be 30,000 INCOME from the "leftover" debt not satified.

I read to understand that line 1 is only the amount of debt cancelled, which in a short sale is only the difference between the outstanding loan and the sale price. Am I wrong?

[WhiteOleander]

Guys, the 1099C is sent by the lender after the lender has decided what part of the debt was not paid and is now canceled. The t/p does not get to figure this out.

Below is the instuctions for 1099C from the IRS website. Notice that the instructions for box # 2 state that if you do not agree with the amt canceled, contact the lender. So, in our example, the 30,000 is the debt canceled. You are not supposed to figure that out from the 1099C. It has been decided. The FMV doesn't have anything to do with deciding if any of it is taxable. You have to go to the other things, bankruptcy, insolvency, etc. to determine if the t/p has to include any of the debt into income.

The FMV in box 7 is provided so you can report the "sale" of the property on Sch D or 4797 or wherever appropriate.

These forms are confusing. Usually the t/p gets a 1099A and a 1099C and it is not so difficult to see the correct approach.




INSTRUCTIONS FOR 1099C


Instructions for Debtor
If a federal government agency, certain agencies connected with the
Federal Government, financial institution, credit union, or an organization
having a significant trade or business of lending money (such as a
finance or credit card company) cancels or forgives a debt you owe of
$600 or more, this form must be provided to you. Generally, if you are an
individual, you must include all canceled amounts, even if less than $600,
on the “Other income” line of Form 1040. If you are a corporation,
partnership, or other entity, report the canceled debt on your tax return.
See the tax return instructions.
However, some canceled debts are not includible, or fully includible, in
your income, such as certain student loans (Pub. 525), certain debts
reduced by the seller after purchase (Pub. 334), qualified farm debt (Pub.
225), qualified real property business debt (Pub. 334), or debts canceled
in bankruptcy (Pub. 908). Do not report a canceled debt as income if you
did not deduct it but would have been able to do so on your tax return if
you had paid it. Also, do not include canceled debts in your income to
the extent you were insolvent. If you exclude a canceled debt from your
income because it was canceled in bankruptcy or during insolvency, or
because the debt is qualified farm debt, qualified real property business
debt, or qualified principal residence indebtedness, file Form 982,
Reduction of Tax Attributes Due to Discharge of Indebtedness (and
Section 1082 Basis Adjustment).
Box 1. Shows the date the debt was canceled.
Box 2. Shows the amount of debt canceled. Note: If you do not agree
with this amount, contact your creditor.
Box 6. If the box is marked, the creditor has indicated the debt was
canceled in a bankruptcy proceeding.
Box 5. Shows a description of the debt. If box 7 is completed, box 5
shows a description of the property.
Box 3. Shows interest if included in the canceled debt in box 2. See Pub.
525, Taxable and Nontaxable Income, to see if you must include the
interest in gross income.
Box 7. If, in the same calendar year, a foreclosure or abandonment of
property occurred in connection with the cancellation of the debt, the fair
market value (FMV) of the property will be shown, or you will receive a
separate Form 1099-A, Acquisition or Abandonment of Secured Property.
Generally, the gross foreclosure bid price is considered to be the FMV.
For an abandonment or voluntary conveyance in lieu of foreclosure, the
FMV is generally the appraised value of the property. You may have
income or loss because of the acquisition or abandonment. If the
property was your main home, see Pub. 523, Selling Your Home, to
figure any taxable gain or ordinary income. See Pub. 544, Sales and
Other Dispositions of Assets, for information about foreclosures and
abandonments.
Account number. May show an account or other unique number the
creditor assigned to distinguish your account.
Note. You may not have to include in income all or a portion of certain
qualified principal residence indebtedness canceled in 2008. See Pub.
525, Taxable and Nontaxable Income, for more information

[JG EA]

Guys, the 1099C is sent by the lender after the lender has decided what part of the debt was not paid and is now canceled. The t/p does not get to figure this out.

Below is the instuctions for 1099C from the IRS website. Notice that the instructions for box # 2 state that if you do not agree with the amt canceled, contact the lender. So, in our example, the 30,000 is the debt canceled. You are not supposed to figure that out from the 1099C. It has been decided. The FMV doesn't have anything to do with deciding if any of it is taxable. You have to go to the other things, bankruptcy, insolvency, etc. to determine if the t/p has to include any of the debt into income.

The FMV in box 7 is provided so you can report the "sale" of the property on Sch D or 4797 or wherever appropriate.

These forms are confusing. Usually the t/p gets a 1099A and a 1099C and it is not so difficult to see the correct approach.

You are right. I actually studied this subject this summer and had it somewhat straight then, But I was so sure (in my case) that the client's total debt was the amount cancelled. But I was wrong and it was indeed FMV + COD.

Line 1 of the worksheet in TTB say "Figure income from cancellation of debt". I didn't, in my wrong assumption, notice the word figure.

Thanks so much for straightening this out.

[WhiteOleander]

You are right. I actually studied this subject this summer and had it somewhat straight then, But I was so sure (in my case) that the client's total debt was the amount cancelled. But I was wrong and it was indeed FMV + COD.

Line 1 of the worksheet in TTB say "Figure income from cancellation of debt". I didn't, in my wrong assumption, notice the word figure.

Thanks so much for straightening this out.

I have gone around in circles over this very thing many times myself. I think it's because the T/Ps are so upset that they have to pay tax on the debt. I have a hard time getting them to understand the concept of including the canceled debt into their taxable income. So, we as preparers try as hard as we can to make it not taxable.

[DebbieC100]

Form 982

Don't you also need to file a form 982?

Debbie C100

[BHoffman]

White Oleander - You are the greatest!

Thanks for explaining this so well. I'm printing this discussion and keeping it handy.