Rental Foreclosures, Again

[geekgirldany]

Okay I think I have about wrapped this up. Sorry this is a long post with several questions. I want to make sure I am correct on the reporting.

In May 2008, Rental properities were foreclosed on. I am looking at cancellation of debt income. There are three props. that had outstanding principal more than the FMV. So to my understanding this is cancellation of debt and has to be reported as income. Is this correct?

Also the cancellation of debt income, would this reported on Schedule E since this was rental props?

Another double check...

not only will they report COD income but gain/loss is reported from the deem sale of the rental props. because of the foreclosure which is the smaller of the FMV or cancelled debt?

Plus they may or may not receive a 1099-C in 2009... since the COD Income will be reported in 2008 I assume that the 1099C amounts will not be reported. Well let me put it this way 2008 would have to be amended and the 1099C amounts put on 2009?

I know alot of questions but I have not had much experience with foreclosures so I want to make sure I have it right.

Thank you for any help

[solomon]

Why not wait until you receive a 1099-A or a 1099-C. Perhaps the lender will seek a deficiency judgment as well - if your state permits that.

[geekgirldany]

He has already got a 1099-A for 2008. They were foreclosed on around May 08. Should have put that I was talking about 08 tax year.

[solomon]

He has already got a 1099-A for 2008. They were foreclosed on around May 08. Should have put that I was talking about 08 tax year.

The 1099-A should appear on the 2008 return.

[geekgirldany]

Thanks Soloman.

I guess what I am trying to find out about is the cancellation of debt income. There are two transactions from the foreclosure. The COD income and then deem sale from the foreclosure. My assumption is that the COD should be listed on 2008 return. But what if he receives a 1099-C later?

[solomon]

My assumption is that the COD should be listed on 2008 return. But what if he receives a 1099-C later?

Not sure about that assumption. Then why would not the lender issue a 1099-C in 2008 rather than the 1099-A?

If your state permits deficiency judgments and the lender so pursues one successfully, then that would reduce the amount of any future potential canceled debt. In other words, at this point you do not know for sure if there will be any canceled debt and if there is, what the amount will be.

[WhiteOleander]

Thanks Soloman.

I guess what I am trying to find out about is the cancellation of debt income. There are two transactions from the foreclosure. The COD income and then deem sale from the foreclosure. My assumption is that the COD should be listed on 2008 return. But what if he receives a 1099-C later?

There is only one tranaction from the 1099A. That is property sale.

The lender has time to try to collect the debt before it is canceled. Our state is two years I think. So, the t/p cannot decide which year it is canceled. As someone said, the lender may go after some collection efforts instead of just writing it off.

[geekgirldany]

Okay thank you guys for posting and helping me get this straight. What I read got me a little confused and made me think both had to be done in the same year. But I see what you mean that it is not known yet if the amount will be written off.

Thanks so much again for clearing it up for me.

[Jesse]

http://www.thetaxbook.com/forums/showthread.php?t=11134&highlight=1099a+1099c

If you haven't already reviewed the thread, the above link may help you out as well.

[geekgirldany]

Thanks jesse for posting that thread. I had not done a search on the forum before posting..... really should have done that first.

[JON]

Rental is business

property. Why do you care what the FMV. The sales price is the mortgage plus other foreclosing charges including interest, legal etc and the your basis should be right on your depreciation schedule. The 1099 A or C may give you information as to add ons to the mortgage balance for the gross proceeds. Do you think I am trying to get capital gains for ordinary income (cancellation of indebtness)????????????

[WhiteOleander]

property. Why do you care what the FMV. The sales price is the mortgage plus other foreclosing charges including interest, legal etc and the your basis should be right on your depreciation schedule. The 1099 A or C may give you information as to add ons to the mortgage balance for the gross proceeds. Do you think I am trying to get capital gains for ordinary income (cancellation of indebtness)????????????

If there is a 1099A issued due to foreclosure, the FMV listed in box 4 is considered the sales price of the property. Then the t/p uses that figure to compute his gain or loss on the property.

The amount reported in box 4 is reported to the IRS. It is the gross sales price. If the t/p doesn't report the sale on his return, he will receive a letter from the IRS. This is just like the t/p selling stock. If he doesn't report the sale on his return, the IRS will write a letter for tax on the entire amount because they have no info on the basis.

That's why you care what the FMV is.

[BHoffman]

I thought you report the lower of box 2 (Balance of Principal Outstanding) or box 4 (Fair Market Value) as the sale price unless the client received cash from the bank sale of the rental property.

[AuditorTurnedGood]

I have

a minimum of 4 rentals that did the short sale/foreclosure act for 2009 for my clients, and 2 people who moved into their previous rental properties because they were cheaper to keep than the big places they lost. (I have this depreciation recapture fear in my head on those two).
Sounds like we're all in the same, somewhat hole-ritteld boat. We'll get through it together. Great discussion!

[geekgirldany]

Yes from my reading in TTB you report the lower of box 2 or box 4. In one rental house the loan is actually less than the FMV.

Auditor... and we are always the ones give them the good news on taxes