Form 1099-A Rental Property - Mtge Ins

[Burke]

Have a 1099-A on foreclosed rental property held for years, with depreciation. Box 5 is checked YES. Client had mortgage insurance on property. It is my understanding that mortgage insurance will pay off the entire debt. Is this correct? TP will have a taxable gain.

[erchess]

Mortgage Insurance

I feel certain that the insurance paying off very much depends on facts and circumstances. To even have an idea you'd need to read the insurance contract or talk to the company. I personally would have thought that if the insurance paid off he'd get to keep the house. On the other hand there have to be people on this board who know the answer and I know I'm guessing. I would not have posted but after three hours no one else has so I did.

[JG EA]

I read on this board that PMI mortgage insurance can be absolutely no help to the buyer.
From the internet:

Is it the same thing as Private Mortgage Insurance?
Private mortgage insurance (PMI) is an insurance policy that makes it easier to get financing to buy a home if you don't have enough cash to make a 20% down payment on the home. It provides a payout to your mortgage lender if you default on your loan, but it does not make any mortgage payments or pay off your house balance for you in case you are not able to make your payments. Your mortgage protection insurance policy will list you or your loved ones as beneficiaries and primarily serves your interests, not your lender's, although your lender will certainly be glad that you won't default on your loan payments.

[Burke]

Interesting. I am going to have him bring in the mtge ins policy. (The lender made him buy it to get the loan.) I was thinking it would cover the difference between the amt actually received from its sale by the lender and the outstanding mortgage. He asked for a loan modification and the bank told him he had to be behind in his payments to be considered, so he let it go by without paying, then they said sorry, foreclosure! However, I don't think it affects the calc of the gain, does it? Your quoted post says "it provides a payout to your mortgage lender if you default on your loan..." That indicates to me it will pay it off.

[Gretel]

I am going out on a limb here. I, too, thought that MI is for paying mortgage to bank if TP went belly up. I have been thinking what the situation would be on COD income if indeed insurance paid up. I don't think that this should be considered COD income since it was actually paid.

[Burke]

I am not looking at it like that. In this particular case, it seems the TP has a taxable gain on the disposition of the rental property since he got total relief from the outstanding mortgage, either through outright sale or insurance payoff or a combination of the two. The outstanding mtge is the sell price. His basis is much lower. We have deducted the PMI premiums as a rental expense each year.

[Gary2]

I am going out on a limb here. I, too, thought that MI is for paying mortgage to bank if TP went belly up. I have been thinking what the situation would be on COD income if indeed insurance paid up. I don't think that this should be considered COD income since it was actually paid.

I thought the PMI company still has the right to collect from the borrower. In other words, the debt doesn't go away, the PMI company simply buys the account from the lender. The PMI company can still choose to cancel the debt, creating the COD income.