Foreclosure Rentals, Partners

[geekgirldany]

I have a client that was a "partner" with her sister in law on rental props. (no partnership return) When I first took her on as a client she said that they went in half to purchase the props. I asked if it was listed on the title and loan papers this way. She said yes.

Well go forward 3 years the props have now been foreclosed on and my client received a 1099-A for the full amount of the outstanding loan. Box 5 is marked yes. In all but one rental the FMV Box 4 is less than the Loan Balance Box 2. Come to find out my client is responsible and the sister in law was never on the loan. I won't go into great detail but the sister in law is being investigated for various crimes involving the selling of homes.

So these rental props have been reported on Schedule E with the purchase price of the props being divided between my client and her sister in law. Depreciation has showed as such.

My question is in reporting the gain from the foreclosure. Since only half of the adjusted basis is showing on my client's return she will have a big gain from the props. So pretty big tax. Is she just up the creek without a paddle or could the 1099A info be divided in half and reported that way? I am thinking no because there is nothing showing sister in laws name.... on anything.

Would appreciate any input and thank you for reading.

[solomon]

The prior splitting for taxes seems to tell the story. Create a 1099-A as a nominee for the other sister-in-law and split the amounts on the first 1099-A. A 1096 would have to be filed.

[geekgirldany]

Thanks Soloman. I will see if the sister in laws SS# can be retrieved. I am guessing not. So my customer may not have a choice.

[Burke]

IMy question is in reporting the gain from the foreclosure. Since only half of the adjusted basis is showing on my client's return she will have a big gain from the props. Is she just up the creek without a paddle or could the 1099A info be divided in half and reported that way? I am thinking no because there is nothing showing sister in laws name.... on anything.

Are you saying the SIL's name was never on the deed, settlement statement when purchased or real estate tax bills? If so, can you not go back 3 years and amend your client's returns? Or was it just not on the loan? If the SIL put up half the money, what did she have to show for it? Note to your client?

[geekgirldany]

She said that her name was not on the loan and I thought she said on the title either. I went back to look at mortgage interest statemetns I had scanned in from prior years. Only her name is listed. I am going to have to get some details that is for sure.

Burke I appreciate you mentioning the amending of the tax returns. That is what I had thought of late last night. It just hit me. After I get all the detail that maybe the only way to go.

Thank you for posting.

[geekgirldany]

I was just wanting a little more input on this as I have received additional information.

After a title search my client's partner (sis in law) was never put on the deeds for the rental houses. Partner's name wasn't on anything. There were some warranty deeds filled out and filed with the local court house. Client talked to a lawyer and was advised that the warranty deeds were not valid for many reasons. A bank account was set up for the rentals with both my client's and sis in law's name on it. SIL was suppose to manage it. My client found out other wise. Other things also happened. I won't go into great detail. After talking to my client she was basically taken to the cleaners.

I told her of the options. Doing a 1099A to SIL is really not an option as she was never on anything related to the houses except a checking account. My client is hesitant about amending the returns for prior years as she thinks the IRS may come calling. I told her that I can't half the 1099A. There is nothing to show that the SIL was liable for anything regarding the houses. That either she pays the taxes or amends. I am not halving the 1099A. I don't think that is correct and might lead to penalties on my part.

My only conclusion is to do amended returns and let the dust settle where it might. What do you guys think? She seems concerned about SIL's tax returns if I amend hers. I am wondering if I should even get involved.

[Nashville]

SIL is SOL

SIL is SOL

[Burke]

Don't worry about the SIL's returns. (I assume you did not do them). If client was sole owner of properties, then she is entitled to all the depreciation at least. She may have to claim all the rents, however, since I am assuming they went into the checking account, but expenses should have been paid out of there too. From what you are saying, it would seem to me the taxpayer has an obligation to amend, for to shift income and deductions etc to another person who did not have any ownership interest nor any legal obligation on the mortgage would be incorrect (possibly illegal?) Anyway, if the SIL's name is on the bank account, they have her SSN. Get a copy of the signature card.

[geekgirldany]

Thanks so much Burke. No I did not do the SIL's returns. The rentals are in another state along with the SIL. I don't really think there will be a problem with my client amending to claim all the rents. There were losses most years on the rentals. I know some were limited because of my client's income. I'll pass along about the bank account and signature card. I'll also recommend that they get all cancelled checks and bank statements.

I'll give the client my recommendation. If they do not want to amend then they can go some where else. I appreicate the input.