foreclosure

[oceanlovin'ea]

New client just came in with 1099-C from mortgage company. She has owned house for 18 years with 2 different husbands and now it was hers alone again.
Here is example of figures:
Box 2 - amount of debt cancelled - 185,000.
Box 7 -FMV of house - 162,000.00 (property records from county show lower amount)
But that is what bank showed and sold it for close to that amount.

She refinanced 2 or 3 times....once had some consolidation in it and once for lower interest rate and once to reduce payment amount. She has no earthly idea how much was spent on the house (although they remodeled the whole house) and how much was used to pay off credit cards, etc.
She isn't insolvent because she does have a retirement plan where she works. She was so upset at losing her house and having to move in an apartment, she shredded all the papers she had been keeping.. How is she going to figure out this mess? Is there a figure that she is safe taking? She wants to know if she will have to have receipts for all the things done to house to prove her figures because she doesn't have any.

Thanks for your help. This is actually my first foreclosure of this sort. I just knew she would be insolvent but then that retirement account showed up. Not going to do anything that isn't right....just not sure what is allowed.

Linda, EA

[oceanlovin'ea]

just bringing this back up. Sure need some advice.

Linda, EA

[David1980]

What was the balance of loan outstanding? $347k? (Bank got house of $162k, so subtract that and you have a remaining balance of $185k for the cancellation of debt.)

As far as purchase price, you might be able to find the history on a county website, or perhaps even Zillow (but not sure if it's history will go back that far.)

[oceanlovin'ea]

Balance she owed was the $185,000 that the bank forgave. Bank got house bank and sold it in a couple of months for very close to the FMV. She doesn't have to pay them anything else back.

She is very worried since she shredded all the paperwork regarding the house that she would have nothing to prove whatever figures we use.

I am sure she used some of the money from refinancing to pay off credit cards but she hasn't a clue how much since it was many years ago.

Linda, EA

[solomon]

Balance she owed was the $185,000 that the bank forgave. Bank got house bank and sold it in a couple of months for very close to the FMV. She doesn't have to pay them anything else back.

She is very worried since she shredded all the paperwork regarding the house that she would have nothing to prove whatever figures we use.

I am sure she used some of the money from refinancing to pay off credit cards but she hasn't a clue how much since it was many years ago.

Linda, EA

Now that the topic of credit cards is introduced, that triggers the ordering rules. CODI is still 185K but the equity taken out for the credit card payments can not be excluded. The rest of it could be - assuming 185K was not all credit cards.

[Burke]

Original purchase price should be easily obtained from county records. Copies of HUD-1's on refi info might be available from bank, but over 18 yrs ..... loan could have changed hands many times.... If they used a remodeling company to do whole house, maybe there are some records. Can't think of any magic bullets. She can just take her chances.....

[solomon]

You don't need to be concerned about basis - purchase price and improvement. She has a 250K exclusion under §121. The sale price is 162K so the basis could be zero and it would be excluded.

The taxpayer has - as previously noted - CODI of 185K. The only thing she needs to be concerned about is if all of that can fall under §108 and reported on Form 982. She needs to give you an amount of the equity taken out for the credit card payments. That amount subtracted from 185K would be the amount excluded that would go to Form 982 and the credit card payments would be taxable. If credit card use is 185K or more, then the 185K is taxable.

[Burke]

You are correct. It wasn't basis I was thinking of, but documenting acquistion price and improvements to determine what debt would qualify for exclusion.

[solomon]

With the information presented, the only amount that could not be excluded is credit card payments. Therefore, cost and improvements should be moot. Ostensibly, no chance on documentation.

[Burke]

With the information presented, the only amount that could not be excluded is credit card payments. Therefore, cost and improvements should be moot.

Except that, as I understood the post, she didn't have a clue how much the credit card payments were. If you could document cost + improvements, then by default the amt left would be non-qualifed debt.

[solomon]

Chances of that seem nil. Taxpayer needs to give best estimate of equity used for credit payments and go from there.

For the tax preparer protection, §1.6694-2(d)(3)(i)(C) should be used.