Cancellation of Debt -1099-C

[zeros]

I put this on another board but am anxious to get the answer so I can complete client's return. Client received a 1099-C as the result of losing her home. It appears according to the Tax Book that as long as it is a "personal residence" that there would be no reportable income. Page 14-11 indicates that "if not personally liable for the debt (she is not), there is no income from cancellation of debt."

Seeing that she received a 1099-C from the bank and reported to the IRS, is there any reporting requirements?

Must confess my ignorance on this subject.

[RitaB]

You're not ignorant

This is the first time in 15 years I have seen this myself.

There are two transactions here. You are correct, no cancellation of debt income.

However, you also have to determine if there is a gain or loss on the deemed sale. See that worksheet on TTB 14-11. For example, if they borrowed on the house and the debt was more than the basis of the house, they have a taxable gain. See also Pub 4681.

I am pretty green on this myself, so if I screwed that up, somebody help us.

[Gretel]

Here comes the help. If any home mortgage debt forgiveness is taxable depends on the type of loan. Any equity debt can not be excluded under these rules.

[zeros]

IRC 121-Exclusion

This is the first time in 15 years I have seen this myself.

There are two transactions here. You are correct, no cancellation of debt income.

However, you also have to determine if there is a gain or loss on the deemed sale. See that worksheet on TTB 14-11. For example, if they borrowed on the house and the debt was more than the basis of the house, they have a taxable gain. See also Pub 4681.

I am pretty green on this myself, so if I screwed that up, somebody help us.

Wouldn't the exclusion rules be in effect anyway? $250,000/500,000?

[RitaB]

Oh, duh

Yeah, if she qualified for the exclusion Sorry, I was thinking about my own client, who abandoned a time share. See, told you I was green.

[taxea]

Is box 5 marked yes or no. If yes she was responsible for the debt. I am pretty green with this too but I thought if it was real estate it should be a 1099-A, guess not.

[myerstaxes]

I have a few 1099C's sitting in my prep pile, that the client swears that it is the purchase money debt, but the 1099C still states that they are personally responsible...I know that there is no chance that we can get the lender to rescind the 1099C...UGH!!!

[S T]

Equity LOC or Second

I have one of these 1099C's on Home Equity (Box 4)

In California, the loans were being made as a First and a then obtaining a Second or LOC for 100% financing on the purchase of property. It would seem then it was "purchase" money. It clearly shows on the original purchase escrow that the loans were written on the purchase of the property.

Box 5 is checked on these forms as the taxpayer being personally liable for the debt. No amount for fair market value of property in Box 7

This was a short sale - the first loan was agreed to and paid off and lender stated they would not issue a 1099C - Interesting it is the same lender for both the First and Equity Loans.

Do we then just follow the rules for Insolvency Form 982?

Sandy