While most of Americans last night were praying that they would win the 600 plus Million Mega Lotto, I was quietly paying for a vision on COD Income issues that make sense to me.
I have read the guidance offered in TB over and over, but when I apply it to specific situations it often just not make any sense to me
My situation at hand is this.
Lisa buys a rental house in 2007 for 369,000
She made a big down payment.
She operated the rental at a loss for all years, including the final year of 2011.
The house was sold on a short sale with cooperation from the lender in Oct of 2011.
At the time she stopped making payment, she owed approx 280,000 on the mortgage.
By the time of the short sale, with all the accumulated penalties, fees and interest, she owed 300,000.
The house sold at the short sale for 200,000.
Lisa gets a 1099C from the lender for 100,000.
Box 5 on the 1099C is not checked, meaning that the lender is indicating that she is not personally liable for the 100,000 debt.
Following instructions in TB pages 14-10 thru 14-14, I go to work.
TB 14-12, Worksheet for Forclosures and reposessions, Part 1, says, "if nonrecourse debt, there is no income from cancellation of debt income", Since Box 5 is not checked, It appears that the debt is "nonrecourse", however this is always confusing to me, see my thoughts on this later in this post.
So I now move to part 2 of the worksheet.
The amount of debt cancelled by the transfer of the property was 300,000, the bank accepted the 200,000 received at the short sale and forgave the other 100,000. So the amount to enter on line 4 of the worksheet is 300,000?
Lisa's adjusted basis in the property is 338,000, which is purchase price of 369,000 less 31,000 of depreciation to the date of sale, so her loss is <38,000>...ie...debt cancelled of 300,000 less adjusted basis of 338,000 equals loss of <38,000>..she reports a loss of <38,000> on her 4797.
Lisa does not report the 100,000 of forgiven debt on the 1099C because the lender indicates she is "not personally liable" for it, ie...it is "nonrecourse'?
Also, with suspended losses, and year of sale operating loss, Lisa reports a Schedule E loss of <29,000> as this is her only rental property, and this is the year of disposition.
So I have many questions about how this all works, and granted this is busy time for all of us, so I don't expect to get it totally resolved right away, but I do want to put it out there and see what other practicioners are thinking and doing in these situations.
The first thing is this: The checking, or not checking of Box 5 on these 1099C forms seems arbitrary? Not consistent? Meaningless? Not in line with Tax Logic? What am I trying to say here?...The odd thing is this....in my state, these mortgage loans are always full recourse...you agree to pay X dollars, if you don't, and they have to forclose, or you give the property back, or it is sold short or whatever, and the sale proceeds are less than what is owed, you owe them the diference...But apparently is Lisa's case, the mortgage was recourse to begin with, but then as part of the short sale agreement, the lender changed it's mind and agreed to call it nonrecourse?
Further to note is that on Lisa's 1099C, Box 7, the lender indicates that the FMV of property is 0, which of course is also odd and makes no sense, ie, if it sold at short sale for 200,000, you would think the FMV was 200,000???
It seems to me that this whole system of reporting on 1099C is fraught with flaws and inconsistencies and is a minefield quagmire of liabilty. There seems to be no clear way of how to do it right!! And there seems to be no consensus among us professionals of how to do it.
If the lender checks the Box in Box 5, then the amount is Taxable (unless other exclusions apply), if the lender does not check the Box in Box5 , then it is not Taxable??
The lender is deciding if the borrower has to pay tax on the 100,000 or not?
This all by itself is an inconsistency...ie..it is a 1099C form, meaning that the lender is saying that they are cancelling the amount of debt listed....If they check the Box5 then they are saying that the borrower is liable for the debt...if that is the case then why are they even issuing a 1099C? If the borrower is liable for the debt then there is no debt cancallation and should be no 1099C!!
Ok, anyway, this post has gotten way to long, and seems to lack a clear question, and as such, I'm not really certain what I am looking for in an answer.
It is just that this whole business of Forclosure, Short Sale, Deed in Lieu, COD, Repo, etc, etc, is very confusing and the resources available to try to figure it out are not very clear...TB does the best job of it, but it still misses the mark in my mind...maybe more examples would help, maybe a diferent approach, maybe a number of actual examples of how it all works in the real world, ie, this is what happened, this is what the 1099C, or 1099A said, which was wrong (which they often are), here is what you do to work around it, etc, etc..
I know, probably the subject of an entire book...
But of all the area's of taxation reporting, this is the area that gives me the most trouble, and there is so much of it these last few years as the economy tanked and the housing marking crashed...
Ok, enough ranting...time to get back to work..
Harvey Lucas
I have read the guidance offered in TB over and over, but when I apply it to specific situations it often just not make any sense to me
My situation at hand is this.
Lisa buys a rental house in 2007 for 369,000
She made a big down payment.
She operated the rental at a loss for all years, including the final year of 2011.
The house was sold on a short sale with cooperation from the lender in Oct of 2011.
At the time she stopped making payment, she owed approx 280,000 on the mortgage.
By the time of the short sale, with all the accumulated penalties, fees and interest, she owed 300,000.
The house sold at the short sale for 200,000.
Lisa gets a 1099C from the lender for 100,000.
Box 5 on the 1099C is not checked, meaning that the lender is indicating that she is not personally liable for the 100,000 debt.
Following instructions in TB pages 14-10 thru 14-14, I go to work.
TB 14-12, Worksheet for Forclosures and reposessions, Part 1, says, "if nonrecourse debt, there is no income from cancellation of debt income", Since Box 5 is not checked, It appears that the debt is "nonrecourse", however this is always confusing to me, see my thoughts on this later in this post.
So I now move to part 2 of the worksheet.
The amount of debt cancelled by the transfer of the property was 300,000, the bank accepted the 200,000 received at the short sale and forgave the other 100,000. So the amount to enter on line 4 of the worksheet is 300,000?
Lisa's adjusted basis in the property is 338,000, which is purchase price of 369,000 less 31,000 of depreciation to the date of sale, so her loss is <38,000>...ie...debt cancelled of 300,000 less adjusted basis of 338,000 equals loss of <38,000>..she reports a loss of <38,000> on her 4797.
Lisa does not report the 100,000 of forgiven debt on the 1099C because the lender indicates she is "not personally liable" for it, ie...it is "nonrecourse'?
Also, with suspended losses, and year of sale operating loss, Lisa reports a Schedule E loss of <29,000> as this is her only rental property, and this is the year of disposition.
So I have many questions about how this all works, and granted this is busy time for all of us, so I don't expect to get it totally resolved right away, but I do want to put it out there and see what other practicioners are thinking and doing in these situations.
The first thing is this: The checking, or not checking of Box 5 on these 1099C forms seems arbitrary? Not consistent? Meaningless? Not in line with Tax Logic? What am I trying to say here?...The odd thing is this....in my state, these mortgage loans are always full recourse...you agree to pay X dollars, if you don't, and they have to forclose, or you give the property back, or it is sold short or whatever, and the sale proceeds are less than what is owed, you owe them the diference...But apparently is Lisa's case, the mortgage was recourse to begin with, but then as part of the short sale agreement, the lender changed it's mind and agreed to call it nonrecourse?
Further to note is that on Lisa's 1099C, Box 7, the lender indicates that the FMV of property is 0, which of course is also odd and makes no sense, ie, if it sold at short sale for 200,000, you would think the FMV was 200,000???
It seems to me that this whole system of reporting on 1099C is fraught with flaws and inconsistencies and is a minefield quagmire of liabilty. There seems to be no clear way of how to do it right!! And there seems to be no consensus among us professionals of how to do it.
If the lender checks the Box in Box 5, then the amount is Taxable (unless other exclusions apply), if the lender does not check the Box in Box5 , then it is not Taxable??
The lender is deciding if the borrower has to pay tax on the 100,000 or not?
This all by itself is an inconsistency...ie..it is a 1099C form, meaning that the lender is saying that they are cancelling the amount of debt listed....If they check the Box5 then they are saying that the borrower is liable for the debt...if that is the case then why are they even issuing a 1099C? If the borrower is liable for the debt then there is no debt cancallation and should be no 1099C!!
Ok, anyway, this post has gotten way to long, and seems to lack a clear question, and as such, I'm not really certain what I am looking for in an answer.
It is just that this whole business of Forclosure, Short Sale, Deed in Lieu, COD, Repo, etc, etc, is very confusing and the resources available to try to figure it out are not very clear...TB does the best job of it, but it still misses the mark in my mind...maybe more examples would help, maybe a diferent approach, maybe a number of actual examples of how it all works in the real world, ie, this is what happened, this is what the 1099C, or 1099A said, which was wrong (which they often are), here is what you do to work around it, etc, etc..
I know, probably the subject of an entire book...
But of all the area's of taxation reporting, this is the area that gives me the most trouble, and there is so much of it these last few years as the economy tanked and the housing marking crashed...
Ok, enough ranting...time to get back to work..
Harvey Lucas
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