Form 1099-A

[Black Bart]

I had a guy in today asking about this form. In box 2-"Balance of principal outstanding"- was $63,000 and in box 4-"Fair market value of property"-was $71,000. He agreed with Fannie Mae for them to repossess his house, write off his $63,000 debt, and call it even. Nobody mentioned IRS or a potential taxable gain to him.

I've never handled one of these before, but I think he's now liable for tax on an $8,000 gain (even though, as he said, "I did not get no money out of it"), which is the additional amount he could have (in theory) sold it for if he had not just let it go back.

Is this correct? If yes, then where would the gain be posted? Schedule D? Form 1040, line 21? Elsewhere? Any possible ways out (he's not insolvent)?

[Brian EA]

This would be considered a sale of personal property. Depending how long he held the property he can exclude the gain.

What I usually do in a situation like his is, I use the Sale of home WORKSHEET showing the transaction. Although this form is not filed with the return, if you file it electronically the IRS sees it. That should cover him

[Gretel]

Am I missing something?

If we don't know what he actually paid for the house how could we determine gain/loss. The mortgage doesn't give us that information.

1099-A only shows if there is taxable income because of debt relief. As far as I understand it, if mortgage company gets all their money from selling the house (FMV greater than outstanding mortgage), then there is no debt relief.

But maybe I have it all upside down.

[Brian EA]

Am I missing something?

If we don't know what he actually paid for the house how could we determine gain/loss. The mortgage doesn't give us that information.

1099-A only shows if there is taxable income because of debt relief. As far as I understand it, if mortgage company gets all their money from selling the house (FMV greater than outstanding mortgage), then there is no debt relief.

But maybe I have it all upside down.

Ask the client .Get all the info then fill the accordingly.
You are not missing anything Gabe

[Black Bart]

House Sale

Thanks, both. I think my problem's solved because, for some reason, it had not even occured to me that this was the sale of a principal residence (albeit an indirect one). I don't know what the cost of the house was yet, but I'm certain the gain isn't anywhere near the 250K limit for singles and therefore he's home-free (pun intended).

Gabriele: As to debt relief, I thought that was the whole point of the form--to state taxable gain on a repo. Not so?

[Black Bart]

Gabriele again,

Hmm; come to think of it, you're right. The mortgage company did get all their money, so the client did not get any debt relief. Could it be that IRS wants tax on the difference between what he could have sold the property for (FMV) and what he actually did sell/settle for? Or am I reading too much into it?

[Gretel]

No expert here, but the one case I researched I concluded that only if they sell below the outstanding mortgage and T/P is not personally liable for repayment, then you have debt relief and company should issue 1099-S.

As far as I know a 1099-A is an informational statement only.