Rental foreclosure

[Ross]

A client owns two rental houses. One was foreclosed last month. I assume I will have to report this on a 4797 and I will use his net book value as the cost and the amount of the mortgage at the time of the foreclosure as the sale price. Is this correct? TIA.

[SFBOB]

Your Client Is Likly Insolvent

Call the IRS and order Publication 4681 and 544. These will take you step by step through completeing the tax return for the year of the foreclosure.
Your client should start a file of all his assets and liabilities on the day of the foreclosure. Ask him to keep all records of his loan balances on the properties during the year of the foreclosure.
Publication 4681 has a insolvency work sheet. Enlarge on your copy machine and mail to him or her to get started.You cannot prepare the tax return until the taxpayer receives the 1099A or 1099C.
Most clients are insolvent at the time of foreclosure.Foreclosure triggers the sale of the property at FMV.When the taxpayer is insolvent, the basis of the rental property is reduced after calculation of the debt forgiven. The amount of this calculation is reported on form 982, Reduction of tax attributes. Sale is reported on form 4797 with the reduced basis. If the taxpayer is solvent the cancelled debt is reported as income on line 3 of schedule E
Your client can call the lender and request the forms 1900A or 1099C be issued promptly, however I doubt they will.You likely will need to amend the 2009 or 2008 return. I do not recall the year of foreclosure.You can stay up for a few nights reading the publications and still be confused. Good Luck Bob

[WhiteOleander]

The bank will issue a 1099A for the foreclosure. The FMV listed on the 1099A is considered the sales price of the property. Not the remaing balance on the mortgage. The foreclosure is reported as a sale the year the 1099A is issued.

The bank might not issue a 1099C. They may decide to collect the debt instead of cancelling it. Especially if there are assets to go after. So, the debt might not be cancelled for several years.

If the bank does cancel the debt, it is at that time that it is determined whether or not the t/p is insolvent. Insolvency is not determined on the date of foreclosure unless that is also the date the debt is forgiven. Insolvency is determined on the date the debt is cancelled.

If the t/p is not insolvent, the cancelled debt is included into income the year the 1099C is issued. The t/p could be partially insolvent. Then only the amount of cancelled debt exceeding the insolvency is included into income.

HTH

[SFBOB]

White Thanks For Insolvency Date

Thanks for the correction. Am I on track with the thought that part of debt forgiveness could be Income and part adjustment to basis. Example $100,000.00 debt forgiven. Insovent in the amount of $60,000.00, solvent in the amount of $40,000.00. $40,000.00 would be income line 3 if rental property and $60,000.00 From 982 part I line 1d . Line 2 amount $60,000.00.
Form 982 continued Part II line 4 $60,000.00. Thanks for your feed back to see if I am on track. Bob

[WhiteOleander]

Bob,
I think we will help each other figure this out. I know everyone will be seeing alot more foreclosures this year and in years to come. And, sometimes I feel like I'm in one of those mazes they put in corn fields as I'm trying to figure out exactly how to report it correctly.

So, I think the answer to your question is "It depends". Sometimes if the lender forecloses on property and cancels the debt at the same time, they will only issue a 1099C. They will not issue a 1099A and a 1099C. So, the info from the 1099C is used to show the sale from the foreclosure and the amount of cancelled debt.(if any) Or, they might issue a 1099A at first and then later issue a 1099C all in the same tax year. So, when they foreclosed, the lender had not made the decision to cancel the debt, but does so later. In these scenarios, I do believe the cancelled debt would be used as you figure the gain/loss on the foreclosed property. I think it affects the basis. So, I don't think it goes to line 3 of the sch E. The sale would be reported on 4797 and then flow to Sch D. This is how to report this if it all happened in the same tax year.

But, if the lender forecloses and does not forgive the debt in the same tax year, they will issue a 1099A. In that tax year, only the sale from the foreclosure would be reported. The debt has not been cancelled yet so it does not affect the basis of the foreclosed property. Plus, there is no way to know how much the lender will report as cancelled. They will not only cancel the remaining unpaid mortgage, but also attorney fees, and other expenses. So, there's no way to know that figure until the lender drops the gavel and says "That's it". So, if the debt is cancelled in a subsequent tax year, the amt. to be included into income would be figured then. And the issue of insolvency would be calculated then. Then that amount would be reported on Line 21. I think if you put it on Sch E, the IRS would issue a CP2000 notice on un-reported income.

This is how I understand these rules. If you or anyone else can add anything, I think it will help us all. Because, as I said, I really expect alot of these this coming tax season.

HTH

[SFBOB]

White I Agree, Lets keep it Going For The Benefit Of All

If you do not have Publication 4681 order it now. As Tax Book Users read our messages the IRS will soon be sold out. Also order Publication 544.
Page 3 of the Pub says to report cancelled debt as ordinary income when the taxpayer is solvent on Schedule E line 3. Cancelled debt is adjustment to basis on form 982 when the taxpayer is solvent.Solvent or Insolvent is the question.
If the income is regarding Schedule C it is reported on Line 6 Schedule C.Line 21 Form 1040 would be where you report caneled debt non business income. Credit card canceled debt would go here.
The sale of the property should not be confused with cancelled debt income that will be either Ordinary or used to reduce the basis and result in Capital Gain or Loss.
Part I of the 982 line 1e is checked when canceled debt is on the personal residense. The amount excluded is reported on form 982 Part I line 2, not to exceed $2,000,000.00
The sale of the personal residense would be reported on Schedule D , likly a loss however not deductable. I am working in Pub 4681 and have just learned these things in the last few days.ORDER YOUR PUBS 4681 AND 544 BEFORE THEY ARE SOLD OUT.
Have a great day, maybe pick up some aspiin as well. This is a real headache

[SFBOB]

Error in Ellsworth 2:39 PM Reply

The 5th line of my reply to White should read as follows. Canceled debt will be an adjustment to basis when the taxpayer is insolvent. My error was that I said solvent.White; I see there was been 143 visits to your dialogue. Anyone want to jump in? Get your Publications and aspinin.

[WhiteOleander]

Bob, I had a chance this morn. to go look at the Pub 4681. It is very good. It has excellent worksheets.

I don't usually order the pubs from the IRS. I go to the IRS site when I need something and just print the pages I need at that time. This works better for me.

Everyone else, make note of this Pub. If you have it, you will be able to get through a return with cancelled debt, insolvency, or repos.

GET READY. THEY'RE COMING!!!!!!!!

[SFBOB]

1099A & 1099C Instructions

I am going to talk to the bank where I have had a long standing relationship.It will be interesting to know how and when they process these forms.I will also order the forms and instructions from the IRS.
Think about the purpose of the Form 982; It is a report of how we reduce the basis in the property sold.Instructions state that we should attach our work sheet to the form 982. When E Filing returns, we will need to attach electronic memos of our calculations. Most of our transactions will be Rental foreclosues or abandonments as I see it.
The return I am checking for one of my associates is 1099A and the box is checked reporting the Taxpayer as liable for the debt. I do not know how to suggest any amendment at this point. The return was filed for 2008 with cancelled debt and no reduction in the cost basis of the rental property.
To make it more interesting the taxpayer had suspended passive losses in the amount of $111,000.00 due to having taxable income in excess of $150,000 for prior years.Also took a $100,000.00 loan against the property when the FMV was going up in 2007. WOW WHAT NEXT??? Have a good saturday evening everyone.

[WhiteOleander]

Bob, I have a slight difference of opinion. I think we will see more foreclosures on personal residences than rental/business property. I'm thinking that so many walked away from their personal residences because their loans re-adjusted to a higher interest rate and they were upside down in the note.

Now, my crystal ball fell off the shelf and broke during the last stock crash. So, I have no way of knowing for sure. It will be interesting to see how things turn out.

[SFBOB]

Jump In Folks Please Add Your questions or comments.

White, only time will tell if personal residense or rentals. I have cut way back on my practice. Since I have cut back, I spend time helping other preparers with their questions. This foreclosuer business seems to be a hot topic.Seems clients have taken loans on their homes to buy rentals in Arizona and Nevada. I am located 20 miles south of San Fransico where are you?

[WhiteOleander]

I am in South Texas about 60 miles west of San Antonio. It's called the Texas Hill Country. However, these hills are nothing compared to Calif.

Actually, our area has not been hit as hard as others with the foreclosures and job loss. Our real estate has remained somewhat stable. It has declined some.

This area really took a hard hit in the late 80's and early 90's. Quite a few foreclosures, etc then. So I think some of the lenders here were much more careful who they loaned money to. They remembered lessons learned.

Actually we bought our house from the FDIC back in '92 when we moved here. One of the major local home grown banks failed. So, I think some here are still leary.

[SFBOB]

I know the Hill Country

I traveled through that area with my late wife in the late 1980s. We did alot of trailer traveling and had a great time. You live in a beautiful area.My computer service man and his wife are from Texas and will retire near San Antonio sometime in 2010.Thanks for the heads up as the young folks say. Regards Bob

[S T]

Foreclosures

White Oleander and Robert Ellsworth,
Thanks to both of you to being on board the Tax Book - Seems like you have a good grasp of what may "loom" ahead of us with foreclosures, abandonment and cancellation of debt.

I am not looking forward to it, but I believe that there will be more for us to deal with on this issue in 2009 and 2010 tax filings. So I am looking forward to your input and advice as the psots arise.

Sandy

[travis bickle]

Ordering Pubs In A Timely Fashion

If you do not have Publication 4681 order it now. As Tax Book Users read our messages the IRS will soon be sold out. Also order Publication 544.
. . . .ORDER YOUR PUBS 4681 AND 544 BEFORE THEY ARE SOLD OUT.
Have a great day, maybe pick up some aspiin as well. This is a real headache

is always good advice.

Remember, if you order before December 1, you will get the prior year pub; if you order after December 1, you will receive the current year pub.

And -- for what it's worth -- I will be using less paper pubs. I will simply add the required publication as a "Favorite" on my internet browser and access as needed. This is not quite the same as flipping pages, but searches are a lot faster.