Mortgage Forgiveness Debt Relief Act of 2007

[NotEasy]

Taxpayer received two 2009 Form 1099-C due to foreclosure. The total amount is about $300,000. The property was his primary residence. If he has never refinanced, is it safe to conclude that the full $300,000 can be excluded as income because of the "Qualified Principal Residence Indebtedness" rule? Is there anything that we have to look for in order to make sure that none of the $300,000 has to be reported as income?

[veritas]

On the 1099-C

Was the borrower personally responsible (box 5)?

[NotEasy]

Was the borrower personally responsible (box 5)?

Hi veritas, the answer is 'yes'.

[veritas]

First

I would not assume the taxpayer has never refinanced. Why are there two 1099-Cs?. Also in many states, the original mortgage is non-recourse.

[NotEasy]

I would not assume the taxpayer has never refinanced. Why are there two 1099-Cs?. Also in many states, the original mortgage is non-recourse.

Very sharp thinking. I should double check with them about the refinance. Thanks, veritas.

[abctax]

Another possibility to consider

You could have two 'acquisition' debt loans (and therefore two 1098-Cs) if the original purchase was done with a first loan and a second loan (commonly called an 80/10/10 - 80% first, 10% second and 10% down). And in the run-up to the whole real estate debacle, there were even 90/10/0 loans (90% first, 10% second, ZERO down).

And the lenders have notoriously marked the box "personally liable" wrong.

[veritas]

Yep

You could have two 'acquisition' debt loans (and therefore two 1098-Cs) if the original purchase was done with a first loan and a second loan (commonly called an 80/10/10 - 80% first, 10% second and 10% down). And in the run-up to the whole real estate debacle, there were even 90/10/0 loans (90% first, 10% second, ZERO down).

And the lenders have notoriously marked the box "personally liable" wrong.

I think some detective work is in order when you receive one (or two) of these things. The amount of debt given and the FMV could also be questionable.

Another thought. Was the bankruptcy box 6 checked?

[abctax]

The original closing statement would help also, especially if the acquisition was within the last few years.

[NotEasy]

I think some detective work is in order when you receive one (or two) of these things. The amount of debt given and the FMV could also be questionable.

Another thought. Was the bankruptcy box 6 checked?

No, bankruptcy is not checked.

After further examination, actually it was a short sale, not foreclosure. And I also found there was a second loan (looks like a home equity loan) taken out after the purchase. That will be considered income if he did not use the money for home improvement. I guess we may have to consider the insolvency route now...going through the assets and liabilities stuffs...that's something I don't really enjoy doing. *sigh*

[SFBOB]

Pub 4681 Insolvency Worksheet

You can down load the pub from irs.gov if you do not have it.Check the date on the 1099C and the insolvency test is a snap shot in time just before the short sale or foreclosure date. The taxpayer must be insolvent at this time. Have the taxpayer complete the worksheet on page 5. The only way you can exclude loan balances that are not Qualified Principal Residense Loans is insolvency or bankruptcy. Many cannot pass the insolvency test because the FMV of IRA and Company pension accounts must be included with other assets.Most of the taxpayers took out loans as the market value of their homes or rental real estate increased,.very few used the funds to improve their homes. Vacations etc seemed to have top priority. Good Luck Bob.

[oceanlovin'ea]

2 1099C's

My daughter and son in law did a short sale and each received a 1099C. But the problem on theirs is that each of the 1099C has a different address of the property on it. Neither of them is the correct property address....both addresses are in California and we live in Florida.

So we are trying to get the mortgage company (Chase Bank) to issue corrected 1099's.

Linda

[NotEasy]

You can down load the pub from irs.gov if you do not have it.Check the date on the 1099C and the insolvency test is a snap shot in time just before the short sale or foreclosure date. The taxpayer must be insolvent at this time. Have the taxpayer complete the worksheet on page 5. The only way you can exclude loan balances that are not Qualified Principal Residense Loans is insolvency or bankruptcy. Many cannot pass the insolvency test because the FMV of IRA and Company pension accounts must be included with other assets.Most of the taxpayers took out loans as the market value of their homes or rental real estate increased,.very few used the funds to improve their homes. Vacations etc seemed to have top priority. Good Luck Bob.

Thanks. One quick question. Is the loan amount that was forgiven and reported on the Form 1099-C considered a liability in the insolvency test?

[Bert73]

The loan on the short sale should be included as a liability on the worksheet, but remember to only include the amount of the loan right before the short sale. That goes for any other liabilties too!
On the assets part of the worksheet, you will list the basis of the home right before the short sale, along with all the other assets the tp has.

Some clients take forever on these worksheets, they drag their feet and whine during the whole process. Once I tell them what their tax bill will be( if they do not continue sifting through their finances) they usually give me all that I need.
Good Luck

Bob's post above was dead on, when it comes to filling out the worksheet.

[SFBOB]

Basis or FMV at Time Of Short Sale

Bert It would be an advantage to use the short sale price as the FMV on the asset side of the work sheet because it would most likely be much lower than the basis,right? Will be interesting to see what others have to say.

[Bert73]

Yes Bob, the FMV is used for all assets whether its a short sale, forclosure, ect ect. and I should not of thrown out the basis word in my comment.