Determining basis for Forgiveness of Debt

[jamitax]

My client's daughter purchased a house in 2003 for $260,000. She and her parents lived there. In 2006 the house was appraised at $425,000. The parent's names were put on the deed and the daughter's name was taken off. There was no sale. The parents then refinanced the house in June 2006 for $330,000 paying off the daughter's loan. They refinanced again in Oct 2006 for $378,000 - an ARM. The house went into foreclosure and sold in 2008 for $215,000. The parents received a 1099-C for $196,000. They believe they bought the house in 2006. I am trying to figure out what to do with the cancellation of debt - what is the basis of the house? Is insolvency the only method available? I would appreciate any help with this.

[jimmcg]

Read pg.14-10 in The Tax Book and see if it applies to your facts.

[WhiteOleander]

My client's daughter purchased a house in 2003 for $260,000. She and her parents lived there. In 2006 the house was appraised at $425,000. The parent's names were put on the deed and the daughter's name was taken off. There was no sale. The parents then refinanced the house in June 2006 for $330,000 paying off the daughter's loan. They refinanced again in Oct 2006 for $378,000 - an ARM. The house went into foreclosure and sold in 2008 for $215,000. The parents received a 1099-C for $196,000. They believe they bought the house in 2006. I am trying to figure out what to do with the cancellation of debt - what is the basis of the house? Is insolvency the only method available? I would appreciate any help with this.

The basis of the house does not come into play for the COD. If they disagree with the amount that the lender says is forgiven, then they must get the lender to re-issue the 1099C.

If this house was the parents' primary residence, then they may quailfy for the qualified residence exclusion for form 982. Otherwise, you will have to figure if they were insolvent on the date listed an the 1099C as the date the debt was forgiven.

[S T]

Hmmm

Wasn't there a sale when

The parent's names were put on the deed and the daughter's name was taken off. There was no sale. The parents then refinanced the house in June 2006 for $330,000 paying off the daughter's loan.

Sandy

[JohnH]

That's what I was thinking as well, but was just waiting for more clarification. If the house was subject to a mortgage but "the parents' names were put on the deed and the daughter's taken off" in 2006, then there had to be a sale. Especially since there was a subsequent refinance. Unless maybe there was some sort of "reverse hillbilly estate planning" going on here.

I'd be asking for lots of documentation from the clients before moving forward on this one. Definitely need to know the exact dates of each transaction and what actually happened from a legal point of view. Seems like there could be lots of traps for the preparer here, especially if the primary residence exclusion is used.

[Gretel]

My 2 cents. If it is true that this was the primary residence of parents then the sale doesn't need to be reported. I agree, that a sale to parents was done when they paid off the mortgage.

Since there is a new exclusion available for COD income for a principle residence the most important question is if the last refinance ($48000 more) was done to include other debt or if they used the money for improvements. If they used it for improvement probably all COD income can be excluded.