Insolvency

[Snaggletooth]

I will have at least two clients who will receive debt forgiveness 1099-As in excess of their proceeds.

Typical example: Client paid $230,000 for personal residence, tried to sell it for 3 years, still owed
$228,000 at the time the bank sold it at auction for $158,000 in a depressed housing market in a depressed economic area. Amount of forgiven indebtedness, $70,000.

Loss of $72,000on sale of personal residence not deductible. The transaction is not taxable if the taxpayer is insolvent. Is there any document (IRS form) which is required to state the assets/liabilities to substantiate the insolvency?

[Lion]

Form 982

Form 982 might be what you're looking for. I know I should be prepared for a client walking through my door with this or a similar situation, but I haven't done a Form 1099-A or -C in years. I think your client has only a sale if he's receiving Form 1099-A. He will have forgiveness of debt when he receives a Form 1099-C when the mortgage company decides they cannot collect from him, if ever.

[OtisMozzetti]

to the extent of insolvency

Amount of forgiven indebtedness, $70,000.

The transaction is not taxable if the taxpayer is insolvent. Is there any document (IRS form) which is required to state the assets/liabilities to substantiate the insolvency?

The debt cancellation is excluded from income "to the extent of insolvency". There is an "Insolvency Worksheet" in the IRS Publ. entitled Repos, Foreclosures, and Debt Cancellation.

The extent of insolvency is simply the debts/liabilities minus the assets just prior to the debt cancellation. The worksheet essentially consists a list of the assets and of the liabilities.

[S T]

Form 982

If you receive/report a 1099 -A (abandonment or maybe foreclosure) would you use the form 982?

but if t/p receives/reports 1099-C (cancellation of debt) is when you use the form 982?

I am still confused by these rules for reporting

Sandy

[MariaR08]

If you receive/report a 1099 -A (abandonment or maybe foreclosure) would you use the form 982?

but if t/p receives/reports 1099-C (cancellation of debt) is when you use the form 982?

I am still confused by these rules for reporting

Sandy

I second that! I know for a fact I will have (at least) two clients this upcoming tax season that had some kind of mortgage loan modification - whereby one client has a 1st & 2nd and the bank lowered the APR on the 2nd, hence lowering the overall mortgage payment.

In the other instance I'm not sure of the details yet but it's in "modification" process right now.

Anybody know of a good online tutorial/class that is specifically geared for working with these clients and the different situations that might come up?

~maria

[Davc]

If you receive/report a 1099 -A (abandonment or maybe foreclosure) would you use the form 982?

but if t/p receives/reports 1099-C (cancellation of debt) is when you use the form 982?

I am still confused by these rules for reporting

Sandy

1099-A is reported as a sale, not COD.

[JON]

982

I think the form forces you through the steps. If the entire mortgage is acquisitioin indebtness and it is your quailfied home you do not get taxed to the extent of 250/500. There is also a place on the 982 to check you are insolvent.

[Gretel]

I second that! I know for a fact I will have (at least) two clients this upcoming tax season that had some kind of mortgage loan modification - whereby one client has a 1st & 2nd and the bank lowered the APR on the 2nd, hence lowering the overall mortgage payment.

In the other instance I'm not sure of the details yet but it's in "modification" process right now.

Anybody know of a good online tutorial/class that is specifically geared for working with these clients and the different situations that might come up?

~maria

I highly recommend Bob Jennings. His website is www.taxspeaker.com.

He has a two hour seminar for COD income etc. upcoming on 12/16 as streaming seminar.

[MariaR08]

I highly recommend Bob Jennings. His website is www.taxspeaker.com.

He has a two hour seminar for COD income etc. upcoming on 12/16 as streaming seminar.

Great link!

Thanks Gretel!

~Maria