Mortgage interest on 1098 for $93k

[origun]

Taxpayer received a 1098 for $93k mortgage interest. Home ($335 k mortgage) was foreclosed in March 2010 with very little interest, if any, being paid that year. Taxpayer consulted mortgage company and they said to claim it on return. He also visited a local IRS office and they said basically the same thing--use it to bring taxable income to zero for 2010. Has anyone encountered such a situation? What did you do?

And, no 1099-C or 1099-A have been received at this point.

[kpangelinan]

Taxpayer received a 1098 for $93k mortgage interest. Home ($335 k mortgage) was foreclosed in March 2010 with very little interest, if any, being paid that year. Taxpayer consulted mortgage company and they said to claim it on return. He also visited a local IRS office and they said basically the same thing--use it to bring taxable income to zero for 2010. Has anyone encountered such a situation? What did you do?

And, no 1099-C or 1099-A have been received at this point.

Just use it. I wouldn't have gone as far as to contact the IRS. If the bank issued it, then maybe that's what was paid, unless you want to dispute the banks reporting. Why bother?

[JON]

Something

does not sound right. Was there a abandoment or cancellation of debt. If the 93 is caused by one of those and he does not have income to report, because of residence or insolvency I do not think he gets it. This has to be several year's of interest or a mortgage over a $1,000,000, interest limited. 1099A and C can come later, especially C. If you do take it and part is forgiven later he has income - if an exception applies to A or C he does not get the deduction unless he paid it.

[origun]

No 1099 A or C

Taxpayer made no house payments in 2010, moved out in March (or maybe it was May!) and the house was sold in October for a little over $100k by Saxon Mortgage, the company that issued the 1098. It was his personal residence for enough time that there will be no COD income. The $93k would be more interest than would have been paid in the entire 5 years he owned the house.

So...I have concluded that the 1098 must be in error and will not sign a return with such a gross error. I can't think of anything it could possibly be except an error. He was told by an accountant friend to take the deduction and "carry it forward"--I'm assuming he meant as an NOL. Maybe he should go to the "friend" to have his taxes done!

Thanks for your input. If anyone has any other thoughts before I go back to work on Thursday, would appreciate any other ideas!

[Burke]

I'm with you. This has got to be an error. Mtge interest is deducted, IF it is paid by the TP. Obviously, he did not and I would not take the other two persons' advice, I don't care if it WAS the IRS!

[Lion]

Ask Saxon

I wouldn't call the IRS. Have your client call Saxon. Did they apply the $100,000 sale price to mortgage interest first, thus paying $93,000 of mortgage interest during 2010? They should know how the Form 1098 was prepared.

[Burke]

Now that is something I had not thought of. Probably because I have never heard of it before, but it is a possibility.

[origun]

Interesting thought, Lion

I do have a printout from Saxon that the taxpayer obtained... which made no sense to me when I first looked at it. When I go back to work on Thursday, I'll look at again, keeping Lion's thought in mind.

I may be simple minded..but I have trouble even thinking about deducting anything which wasn't actually paid by taxpayer with after tax funds in the relevant tax year. Regardless of Saxon's bookkeeping, taxpayer paid nothing in '10 toward mortgage interest or principal. And he won't have any 1099-C income in the future, I wouldn't expect, as it is a non-recourse state and the debt that was canceled should be exempt from COD income as it was a qualified personal residence.

The taxpayer is not a former client of mine; he has done his own taxes in the past. So I don't want to go out on a limb for a questionable return. I'd probably never get any more business from after this return..unless he hears from the IRS.

Thanks for all your input--I appreciate all the thoughts from people like you with a lot of experience!

[JohnH]

I've seen a couple of situations where the mortgage company made a gross error on the 1098. Trying to get an explanation from someone answering the phone and reading from a script was impossible - getting the 1098 changed was out of the question.

I just looked at the original loan document, calculated the actual interest paid, and that's what we deducted on the return. If we'd been questioned about it, at least we ussed a figure lower than the 1098 we knew to be wrong, and we followed a rational method in coming up with the figure.

================================================== =====================

Speaking of mortgage confusion, I had an interesting experience today. We did a refi in Dec, 2009 and during the process the broker suddenly made some changes in all the loan documents. They basically substituted a new interim lender in mid-process due to a contract dispute of some sort. I didn't complain about the switch because I was getting a 4.5% rate and although the fees were a little high they were not outrageous at the time. The only effect on me was a bit of a delay in closing the loan but we kept the good rate. Today we received a $1,500+ check from the lender with some vague wording about refunding our fees due to a disagreement with our state banking commisioner. I figure that in their haste they must have run afoul of the state banking laws and are trying to unwind their mistakes to keep from being prosecuted. But it sure was a nice windfall.

Now my only concern is whether there will be any more fallout. Within a month after closing, the loan was subsequently sold to a well-known bank in the Charlotte area which I depise, but I've stuck with them simply because of the rate. I can't help but wonder if I'm going to be getting a call from them trying to void the agreement and attempting to increase my rate due to some defect in the original paperwork. Frankly, I wouldn't put it past these clowns.

[Gary2]

I can't help but wonder if I'm going to be getting a call from them trying to void the agreement and attempting to increase my rate due to some defect in the original paperwork.

I can see it now:

Bank: We found a defect in the mortgage papers, and they're really not right. We have to redo them at a higher interest rate.

You: Oh, you mean those papers aren't enforceable as written? I guess that means I don't owe you any more. Thanks!

[JohnH]

Great point. I'll remember that if I should get a call from them.

But I don't rule it out. This crowd is beyond devious. They're gutsy enough to try and pull any "heads we win, tails you lose" stunt they think they can get away with. I've seen them try some unbelievably gutsy things before and I simply don't put anything past them. Whenever I have a client who deals with them, I always warn them of the Russian proverb - "When you dance with a bear, keep your knife handy."

[joanmcq]

A 93K mortgage deduction is an open invitation for an audit. They are doing a lot of them. I wouldn't deduct it. The form has got to be wrong. On the other hand, could there have been some kind of huge prepayment penalty?

Of course, I've seen some major prepayment penalties, but 93K on a 335K mortage is pretty ridiculous.

[S T]

I am thinking

There was some "negative amortization" on the Loan interest somewhere and released on the short sale, and as Joan stated, might be a prepayment penalty.

That is not to say that I think it is deductible at all

You really need to acquire more information.

Ask Taxpayer for prior year end loan statements, or request a Loan History printout.

Sandy

[origun]

Some additional information

I have obtained the foreclosure document and a chronology of the transfer of property. I don't know if this helps or just muddies the water!

The property of the taxpayer (my possible client!) was foreclosed in Nov 2009 (no payments made after '07) and the owner after that, according to the county assessor's record, was a bank who paid less than $200k for the property at that time. Then it was sold to an individual in Sept. 2010.

So...it looks to me like that my "client" had no interest in the property after Nov '09 and has no deductions after that year. [The 1098 was dated 2010.] Am I missing something?

And...as stated before, no 1099-C or A has been received.