Renegade 1099-A

[Nashville]

Taxpayer (otherwise insolvent) has a home with a $180K mortgage. Has been trying to sell for three years, best offer $140K. Basis in residence is $215K, and economics has long since driven this family to renting an apartment in another state where he could find work.

Fannie Mae gives up on this guy ever being able to pay, lets the guy walk away from his $180K debt in 2010, and sends him a 1099-A showing the $180K as the principle amount of indebtedness. No problem. Guy is already insolvent.

But 1099-A shows a fair market value of $225K!!! ACKKKKK!!!

Client will not be able to show insolvency with this kind of FMV.

I've asked him to check with the courthouse of former residence to see if house has sold, and if so, how much did it really bring. Any better suggestions???

[Gary2]

There's no canceled debt until a 1099-C is issued. This sounds like an abandonment, not a foreclosure. Assuming that's the case, then without the 1099-C, all you have is a $215K non-deductible personal loss. If it's a repossession, then there still shouldn't be any cancellation of debt, because they have a property that they assert is worth more than the balance on the loan.

I'm not sure how the reporting is handled if they cancel the debt in a later year than the abandonment. I can imagine that either the taxpayer is treated as not owning the house prior to the cancellation (i.e., the house was lost in 2010, the debt canceled in 2011), so you wouldn't have trouble with insolvency. Or I can imagine issuing the 1099-C with a new FMV that would also address the insolvency, though I don't know how the taxpayer would re-figure the gain or loss.

[snowbird]

Insolvency test should not be necessary for discharge of qualified principal residence indebtedness. See TheTaxBook Deluxe page 14-13. See instructions with Form 982. Am I missing something?

[Gary2]

Insolvency test should not be necessary for discharge of qualified principal residence indebtedness. See TheTaxBook Deluxe page 14-13. See instructions with Form 982. Am I missing something?

It's no longer their main home, and hence doesn't qualify.

[David1980]

So the bank got a house that the bank says is worth $225,000. Unless the taxpayer has refi'd and pulled out additional moneys, the probably owe at most $215,000 to the bank?

I don't see any cancellation of debt here.

[SFBOB]

Basis $215K FMV $225 Gain $10K

If the 1099A figures are accepted, you have a $10K gain. This seems unlikly considering the taxpayer's effort to sell the property. A 1099A is a sale and should be reported. There will be no 1099C because the FMV of $225K is greater than the cancelled debt of $180K.
RIGHT? If you want to avoid tax on the gain; get some comp's from a realtor and report a lower sale price.You are now ready for the audit; which I doubt will come. From the for what it is worth department.

[snowbird]

The IRS has not released Pub 4681 that is suppose to explain "Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals)." The only definition of "Main Home" for Canceled Debts that seem comparable is for the Sale of Residence.

It is unclear from your post if the family has lived in the house for 2 of the last 5 years. They have certainly owned the home the house of 2 of the last five years.

http://www.irs.gov/businesses/small/industries/article/0,,id=98921,00.html

oops ... did find a 2009 version ... 2010 version returns the IRS sorry message

[Gary2]

If the 1099A figures are accepted, you have a $10K gain. This seems unlikly considering the taxpayer's effort to sell the property. A 1099A is a sale and should be reported. There will be no 1099C because the FMV of $225K is greater than the cancelled debt of $180K.
RIGHT? If you want to avoid tax on the gain; get some comp's from a realtor and report a lower sale price.You are now ready for the audit; which I doubt will come. From the for what it is worth department.

Doesn't the issue of a gain depend on whether it was an abandonment, foreclosure, or repossession?

The way I read Pub. 4861 under abandonments, it's treated as a sale for $0. If it's later foreclosed or repossessed, then that changes. The reason I believe that it's most likely an abandonment at this point in time is that, given the facts at hand, it's far more likely that the $225K came from an appraisal than from an actual foreclosure sale.

[JON]

I think

1099A comes when the property is resold, not at the end of the sheriff sale. I think banks are not consistent whith how they do these things at all. The 1099C can happen after the bank takes over and appraisals are always used. It is a forest to crawl through to figure it out.

[Gary2]

1099A comes when the property is resold, not at the end of the sheriff sale

Some banks may do it that way, but the instructions for the form imply that it's wrong. The instructions for box 4 on the 1099-A say:

For a foreclosure, execution, or similar sale, enter the FMV of the
property. See Temporary Regulations section 1.6050J-1T, Q/A-32.
Generally, the gross foreclosure bid price is considered to be the FMV.

I could be wrong, but I interpret "gross foreclosure bid price" to be the winning bid at the foreclosure sale (which would be a sheriff's sale in many places).

The 1099C can happen after the bank takes over and appraisals are always used.

What you're seeing may be colored by the processes in your state, and it could be different elsewhere.

The 1099-C should only happen after the bank takes over or the property is sold at foreclosure. Otherwise they don't know how much they'll get from exercising their lien on the property, and thus don't really know how much debt will be canceled. There may be some wiggle room in the rules that allow the 1099-C to come earlier, but I'd be surprised it that happened often.

The FMV in the 1099-C will be an appraisal if it's a repossession or abandonment. It should be blank if a 1099-A was issued in the same year. If the 1099-A is omitted, with everything reported on the 1099-C, then it will be under the same rules as for the -A, typically the foreclosure sale price.