Deed in Lieu of Foreclosure...Need HELP please

[nwtaxlady]

Client couldn't sell and ended up doing a "Deed in Lieu of Foreclosure". So here are the facts:

Cost Basis (purchase + improvements) = $132,837
Acquisition debt is ONLY = $46037
The rest of the debt is from multiple refinances taking equity out to pay off personal debt.
NOTE: $80,000 was used to put down on new personal residence

The 1099-A Form has in:

box 2 = $150,630 (Balance of principal outstanding)
box 4 = $139,900 (Fair market value of property)
box 5 = is X checked (Debtor personally liable for repayment of the debt)

So how is this treated? What do I do?

I just think it is wrong that their new house is free & clear because of this. I know their is a tax consequence here. I just need directions !!! THANKS!!

[Lion]

They sold their hose for $150,630
Cost basis $132.837
Form 8949 "C"
Is this their personal residence, that they get to exclude their profit?

They might receive a Form 1099-C and have income that year.

[nwtaxlady]

1099-c

so from what I have read, the voluntary conveyance of the property in lieu of foreclosure is not an abandonment and is treated as the exchange of property to satisty a debt.

So put it on Sch D. And then what happens if they do get a 1099-C down the road?

I just don't see how they can get away with that $80,000 of equity taken out to put down for their new personal residence which is free & clear. Something is wrong with this picture.

I know that ACQUISITION debt can be forgiven, but this $80,000 was not is equity debt.

So to answer your question yes, this WAS their personal residence that they couldn't sale and just sat empty for 2 1/2 years.

[taxmandan]

The cancellation of debt is taxable ordinary income just like a foreclosure. Unless it meets the Qualified Principal Residence Debt rules, see TTB 14-12 for details. Or if they can prove insolvency at the time of the cancellation of debt. Sounds to me like the 'gotcha' is that they owe tax on a portion of the canceled debt.

[Lion]

And if it wasn't their personal residence, they owe tax on their profit from the "sale" of their house.

[nwtaxlady]

Only received a 1099-A for 2011...NO 1099-C (as of yet)

So for 2011 all the client has received is a 1099-A. He has NOT received a 1099-C.
So with that, do we only address this on Sch D for 2011. And then address the taxable amount of canceled debt IF and when he does get a 1099-C?

[taxmandan]

So for 2011 all the client has received is a 1099-A. He has NOT received a 1099-C.
So with that, do we only address this on Sch D for 2011. And then address the taxable amount of canceled debt IF and when he does get a 1099-C?

The mortgage companies are not sending out 1099-C forms. The 1099-A is all I've seen from them. They are not required to send both.

[BP.]

I just need directions !!!

I have found Pub 4681 very useful this year.

http://www.irs.gov/pub/irs-pdf/p4681.pdf

[Maribeth]

They sold their hose for $150,630
Cost basis $132.837
Form 8949 "C"
Is this their personal residence, that they get to exclude their profit?

They might receive a Form 1099-C and have income that year.

Isn't the selling price the lower of FMV or debt on a recourse debt?? So would not the selling price in this example be $139,900, basis of 132,837, potential gain if no exceptions apply is $7.063.

Cancellation of debt income would be 150630 - 139900 = 10,730.

I believe that is correct but if I am wrong, please tell me so. I get so confused with these foreclosures.

Maribeth

[Gary2]

Isn't the selling price the lower of FMV or debt on a recourse debt?? So would not the selling price in this example be $139,900, basis of 132,837, potential gain if no exceptions apply is $7.063.

Cancellation of debt income would be 150630 - 139900 = 10,730.

I believe that is correct but if I am wrong, please tell me so. I get so confused with these foreclosures.

I believe you are correct.

[Gary2]

The mortgage companies are not sending out 1099-C forms. The 1099-A is all I've seen from them. They are not required to send both.

I'm still trying to figure out what's going on with this.

According to the 1099-A/C instructions, when they don't send out both, they have to send out the 1099-C, not the 1099-A. If all they got is the 1099-A, then the implication is that the 1099-C will come later.

But I don't understand why. As near as I can tell, the FHA wants the lender or servicing company to send the 1099-C, while the servicing company wants the FHA to send the 1099-C, and neither one is doing it.

[Lion]

Mortgage company or whoever will not send a Form 1099-C until they are done trying to collect the debt, ready to write it off their books. The time varies by state, too.

[Gary2]

Mortgage company or whoever will not send a Form 1099-C until they are done trying to collect the debt, ready to write it off their books. The time varies by state, too.

True - but normally in a deed in lieu situation, they contractually agree to abandon collection of the remaining debt at the same time they accept the deed.

[nwtaxlady]

Deed in Lieu NOT a typical forclosure is different..I believe

True - but normally in a deed in lieu situation, they contractually agree to abandon collection of the remaining debt at the same time they accept the deed.

Gary2... From what I have read, I agree with you. The "Deed in Lieu of Forclosure" is NOT a "Forclosure". And so from what I have read, I think this was out of Pub 4681.

The voluntary conveyance of the property in lieu of foreclosure is not an abandonment and is treated as the exchange of property to satisty a debt.

So treating it as a sale on Sch D makes sense. However, I just can't understand why they can take out $80,000 equity to pay for NEW personal residence and Own it free and clear with NO tax consequences since it was NOT acquisition debt. (All the facts are in my original post). This is just not sitting well with me. Think of it this way. My house is paid off and it has FMV of $400,000. So I go take out $300,000 equity out and use that money to go vacation, buy new cars and down size and pay cash for a new house. Then turn around and do a "Deed in Lieu of Forclosure". And Own a home free & clear. This is wrong! So do you see where I am coming from?

So do I just put this on Sch D and that is it?

[Gretel]

I believe where the confusion is is that they would get all the cash for their residence (tax free if lived there 2 out of 5 years) in your scenario to make your point more clear. In a way it is a wash. So putting the mortgage on a house and then having the debt forgiven but no cash from sales of house comes pretty much down to the same. Just my thoughts.