Shared Appreciation Modification for Mortgage

[peggysioux]

Just curious if other tax preparers have run across this type of loan modification. The loan modifications that I have dealt with have resulted in 1099-C's for the taxpayers. However, the "shared appreciation" modification states that the mortgage company may receive 25% of any increase in your house's future value. My question would be if the loan company has the possibility to receive 25% of any increase in house's future value up to the deferred amount, then would the deferred amount not be considered forgiven therefore no 1099-C? The document states that if all payments are made timely for the next three years then the deferred amount will be forgiven but the "shared appreciation" is in effect on-going.

[Snaggletooth]

Interested in this...

PeggySue - this is interesting. Banks and mortgage companies have been historically slow in issuing 1099-Cs, sometimes two years after the fact. Presumably this is because they can't issue them until such date that coincides with them writing off the debt.

This line of thinking is extremely twisted with this concept of "shared appreciation." Firstly, it is obvious they are not "writing off" the loan. Secondly, the "forgiveness" is coupled with an instrument that keeps their hands in the borrower's pocket. I don't think the amount on a 1099-C is even known at the time the mortgage is reconstructed.

I am of the opinion that the mortgage company should NOT issue a 1099-C under the circumstances. If the new mortgage is settled at some point in the future where the house is sold or mortgage is paid off, then a 1099-C would be issued when the loan is OVER WITH and the amount of forgiven indebtedness is known.

Of course, this delay in issuance of a 1099-C may not be enthusiastically welcomed by revenue-starved taxing authorities, but I believe it to be proper.

[peggysioux]

Shared Appreciation Modification for Mortgage

I wrote a question back in 2013 regarding cancellation of debt and the "Shared Appreciation Modification" by the bank. Snaggletooth responded that 1099-C's shouldn't be issued by banks. However, the banks have been issuing 1099-C's for these loans. So I am once again back at the question - how are the banks legally issuing 1099-C's if they potentially have a balloon payment at end of loan if appreciation of property meets certain criteria? And, if they are correct in issuing the 1099-C's, when the loan is paid off and the fair market value of property is such that taxpayer owes balloon payment to bank, then would basis of property be increased? Any input would be greatly appreciated.

[Burke]

I think the answer is that the bank is writing off the deferred loan amount (after the 3 years is up according to the modification agreement?) The potential for shared appreciation may or may not ever be realized. If the bank has written it off and then receives any kind of future payment, it would be income to them. Question is: if the TP had to declare it as COD income, can he deduct any future payment he must make? Or maybe I just don't understand what is going on here.....

[peggysioux]

I think the answer is that the bank is writing off the deferred loan amount (after the 3 years is up according to the modification agreement?) The potential for shared appreciation may or may not ever be realized. If the bank has written it off and then receives any kind of future payment, it would be income to them. Question is: if the TP had to declare it as COD income, can he deduct any future payment he must make? Or maybe I just don't understand what is going on here.....

That was my question as well.....say taxpayer holds onto the home for the life of the loan and has to pay lender the balloon payment of say $20,000, is that $20,000 added to basis, would it be considered interest (in researching SAM's, it appears that the current loans have reduced interest rates (below market value), or handled in another way?