Up Coming COD Issues

[cashjunkie]

Here is something from a CPA webpage....however I have also read that there is NO COD income UNLESS it is a RECOURSE loan which MOST home loans and R/E loans are NOT. NON-RECOURSE foreclosures or short-sales are considered a "sale" by the IRS with the price being the mortgage balance, thus no COD income. In this CPA's example shouldn't he have mentioned this recourse/non-recourse issue?...or am i overlooking something?....It seems we preparers should not see all that much COD income combined with capital losses un-useable against this COD income (except to the 3K limit rules).
If banks issue these 1099 COD forms in error against non-recourse loans....yikes...thats the nightmare.

From a CPA Website:
B. Second home or investment property:
The cancelled debt reflected on the 1099-C will be considered ordinary income, and thus any capital loss the individual has incurred cannot be used to offset such ordinary income. Except that the individual may use up to $3,000 of the capital loss to offset the ordinary income, and any unused capital loss may be carried over to subsequent years, but the taxpayer will have to pay the taxes owed upfront, and any carried over capital loss will used in future years to reduce taxes subsequently, never going over the $3,000 cap

[S T]

And More

Actually just bumping this to the top

But I also see more COD (not sure if they would be recourse or non recourse) due the the credit card failures as well. I have already had a few clients call and say they are filing bankruptcy due to credit card debt

The OP is more about a second home or investment property - but I am all ready hearing about credit card and credit line debt as well. It is very possible by year 2010 we will see a lot of COD 1099 forms and as pointed out, the disturbing item for us and the taxpayer, is whether or not they are being reported correctly.

I already encountered a very small one for 2008 tax filing - not sure I handled it properly, but the amount was so small - I wasn't too worried, so made the notation on the tax return and acknowledged the 1099 filing.

I hope the government provides us with some "real" guidelines" in the upcoming months

Sandy

[erchess]

Revealing My Ignorance

I thought it was rare for anyone except a very large and financially solid business to get a non recourse loan.

I thought mortgages were recourse loans by definition since they are secured by the property in question.

I thought most mortgages allowed the financial institution to come after the borrower if the quick sale after foreclosure yielded less than the full amount owed, unless of course the borrower was in a bankruptcy that reduced or eliminated the debt.

Anyway I stand open to correction on any of this and I hope someone who knows will answer.

[OtisMozzetti]

state laws

I thought mortgages were recourse loans by definition since they are secured by the property in question.

In California, a state law requires that the first loan secured by the buyer's main home be a nonrecourse loan. There may be other states where politics has brought about a similar conclusion. On refinancing if that occurs, the loan may or may not still be a nonrecourse loan.

[AuditorTurnedGood]

It depends on the state

as to whether real estate loans are recourse or non-recourse. In this case, a non-recourse loan means that after the bank takes back the property, they cannot come after the borrower for anything additional, so no COD income exists.

In a recourse state, after the property is reposessed, the bank has the right to come after the borrower for any balance left after the sale of the property. If the bank gives up this right and agrees not to chase down the borrower for the balance, COD income is triggered. This can also occur when the state statute of limitations on the collection of debt expires, generally 7-12 years.

As for the COD income on an property - isn't the sale of a rental property a Section 1231 transaction, allowing for Capital Gains/Ordinary Loss treatment, thus allowing any loss onthe property to offset the COD income? I hope so, or three of my clients are going to be at my door with torches and pitchforks.

[cashjunkie]

COD and rental props

well it is my understanding that unless the property is held as "inventory" and the owner qualifies as a "dealer".... rental property is "investment" property and when sold/foreclosed/short sale.... any gain or loss is a capital loss subject to the usual rules for deducting cap losses....COD income from debt cancellation is considered "ordinary" income and cannot be used to offset mor than 3K of cap losses.....this is why some of my real estate owner/clients are very concerned.

[AuditorTurnedGood]

I took a look at Pub 544

As read the following:

"If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). Do not take that gain into account as section 1231 gain.
Section 1231 transactions. The following transactions result in gain or loss subject to section 1231 treatment.

Sales or exchanges of real property or depreciable personal property. This property must be used in a trade or business and held longer than 1 year. Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). "

So it sounds like a rental property would be section 1231 property. I'm hoping this is correct, or my E&O loss expererience rate is going to go through the roof - I have 6 of these things this year, the largest being about 300K of COD income and a 325K loss on the disposition.

[Davc]

I thought it was rare for anyone except a very large and financially solid business to get a non recourse loan.

I thought mortgages were recourse loans by definition since they are secured by the property in question.

I thought most mortgages allowed the financial institution to come after the borrower if the quick sale after foreclosure yielded less than the full amount owed, unless of course the borrower was in a bankruptcy that reduced or eliminated the debt.

Anyway I stand open to correction on any of this and I hope someone who knows will answer.

Read this: http://banking.about.com/od/loans/a/recourseloan.htm