COD, loan exceeds $2mil, 1099-C

[bruehaus]

Client did a short sale for $1.8m. Loan was original purchase loan. Bank issued a 1099-C for $250,000. Loan balance was $2.05mil. Home was purchased in 2005 for $2.8mil.

I thought an original purchase loan (in CA) was non-recourse; so there should not be any COD. Should we ignore the 1099-C?

If the 1099-C is correct, since the loan exceeds $2m, is only part of the COD non-excludible ($200,000)?

For CA purposes, I think none of the COD is excludible, since the loan exceeded $800,000. Am I correct?

[SFBOB]

Publication 4681 The Cancelled Debt Bible

I suggest you download Pub 4681 if you do not have it. Page 8 explains your example quite well. My take would be that the short sale left the cancelled debt within the $2,000,000 Federal and the $800,000 California limits. If the client had not worked out the short sale, the 1099C could well have exceeded the limits. I woluld check Form 982 Part I Line 1 e and enter the $200,000 on Part I line 2. Part II Line 10 b, enter $200,000. Lets see what others have to say on the subject. Good Luck Bob

[SFBOB]

Sorry, I meant to say $250,000

My error, the total $250,000 should be excluded from income in my opinion.

[Gary2]

First, what does box 5 say? Though the terse IRS instructions aren't clear, I'd expect it to say No for non-recourse debt (though I've also found complaints online from people who thought they had non-recourse debt but box 5 said Yes).

Second, I've seen mixed opinions on short sales for non-recourse loans. Many say it's treated the same as foreclosure (so no canceled debt), but other suggest that it may depend on the specifics. The complication is that the "no-recourse" law clearly applies to foreclosures, but it's unclear if it applies to every short sale, since the terms under which the lender may agree to the short sale vary.

Hopefully, someone with experience with CA short sales can contribute some more helpful advice than I can.