1099A confusion - again

[bgiez]

I posted about this situation a few weeks ago and I understand that I need to report the "sale," but I am concerned about how the sale looks on schedule D/8949. Here are the numbers and details:
home purchased 2005
interest rate 13.something%
purchase price $160k
no improvements
no refinance
client stopped making payments mid 2009
NO 1099C issued
1099A issued by company other than original mortgage holder. Client says they are a debt collection company.
1099A, box 1 date 02/01/2012 (date of lender's acquistion)
1099A, box 2 $230K (balance of principal outstanding)
1099A, box 4 $250K (fair market value of property)
1099A, box 5 checked (borrower personally liable for repayment of debt)

So proceeds of "sale" on D/8949 $230K
Basis on D/8949 $160K
Adjustment to Loss on 8949 ($70K)
Gain/Loss on D $0

My guess is, assuming the client gave me true facts, that unpaid interest was added to principal before or at the time of transfer from original mortgage holder. At least that is the only explanation I can come up with for this. So, do I go ahead and file with the above information or does the client attempt to get a corrected 1099A (fat chance, I know)? It just seems as though we're begging for an inquiry from the IRS. Or do I have this all wrong?

[ddoshan]

I'm confused also. If he purchased the home for 160K and never refinanced .. not sure how he could now owe 230K per the 1099A. 1099C's will show if any interest is added in but don't believe 1099A's factor that in. I think he probably did refinance somewhere along the way.

Other than that it appears even if he did have a profit (Which it would appear he did) it can probably be excluded under the rules.

[mactoolsix]

NO 1099C issued
1099A issued by company other than original mortgage holder. Client says they are a debt collection company.

1099A, box 5 checked (borrower personally liable for repayment of debt)

1099A, box 2 $230K (balance of principal outstanding)
1099A, box 4 $250K (fair market value of property)

1099A, box 1 date 02/01/2012 (date of lender's acquisition)
purchase price $160k

So proceeds of "sale" on D/8949 $230K
Basis on D/8949 $160K
Adjustment to Loss on 8949 ($70K)
Gain/Loss on D $0

My guess is, assuming the client gave me true facts, that unpaid interest was added to principal before or at the time of transfer from original mortgage holder. At least that is the only explanation I can come up with for this. So, do I go ahead and file with the above information or does the client attempt to get a corrected 1099A (fat chance, I know)? It just seems as though we're begging for an inquiry from the IRS. Or do I have this all wrong?

If the FMV is more than the outstanding balance of the loan (box 2-which will include any unpaid interest), why is there a collection company involved?
What needs to be corrected on the 1099-A?

For a recourse note the sale price is the lesser of:
The balance due on the mortgage (230K), or
The FMV (250K)

Less the basis (160K)
Looks like a gain on the sale of 70K (230 - 160)

Why an "adjustment to loss on 8949 of 70K"?

You have a taxable gain on the sale.

Looks like they qualify for a Sec 121 exclusion?

Now, if a 1099-C is issued, which I don't see why, as the FMV (sale $) is more than what is owed, then you enter that, and you then may be able to exclude it:
Canceled Debt that Qualifies for EXCLUSION from Gross Income:

Debt canceled in a Title 11 bankruptcy case
Debt canceled during insolvency
Cancellation of qualified farm indebtedness
Cancellation of qualified real property business indebtedness
Cancellation of qualified principal residence indebtedness

Mike

[mactoolsix]

I'm confused also. If he purchased the home for 160K and never refinanced .. not sure how he could now owe 230K per the 1099A. 1099C's will show if any interest is added in but don't believe 1099A's factor that in. I think he probably did refinance somewhere along the way.

Other than that it appears even if he did have a profit (Which it would appear he did) it can probably be excluded under the rules.

I think the extra principle comes form no payments for 2.6 years @ 13% = about $56K + 160K + penalties, could be 230K

Oops - I stand corrected -
Box 2. Balance of Principal Outstanding

Enter the balance of the debt outstanding at the time the interest in the property was acquired or on the date you first knew or had reason to know that the property was abandoned. Include only unpaid principal on the original debt. Do not include accrued interest or foreclosure costs.

Must be a refi in the hay stack somewhere!

Mike

[bgiez]

Yeah, I know what box 2 is supposed to contain, but

I think the extra principle comes form no payments for 2.6 years @ 13% = about $56K + 160K + penalties, could be 230K

Oops - I stand corrected -
Box 2. Balance of Principal Outstanding

Enter the balance of the debt outstanding at the time the interest in the property was acquired or on the date you first knew or had reason to know that the property was abandoned. Include only unpaid principal on the original debt. Do not include accrued interest or foreclosure costs.

Must be a refi in the hay stack somewhere!

Mike

Client swears there was no refinance, & I thought the 2+ years of no payments on principal would accrue interest enough to account for the discrepancy between the amount reported in box 2 and the original mortgage amount.

In light of the fact that the client says no refinance, should I file with the numbers I have, or...?

[Gary2]

See if you can research info on whether the accumulated interest can be rolled back into the principal. This might explain the reporting, but nevertheless shouldn't remove the client's treatment of it as potentially deductible interest.