Foreclosue--Debt Cancelation

[Super Mom]

Ok, I know this is probably a silly question, but only seems fair. The loan is recourse and I calculated for any income from TTB 14-12. Because the debt cancelation is less than the FMV in box 7, I have a negative number for income, and then a non-deductible capital loss. Question is if they had income would be taxable, but I guess no deduction since no income right?

[veritas]

Is this the same property

Ok, I know this is probably a silly question, but only seems fair. The loan is recourse and I calculated for any income from TTB 14-12. Because the debt cancelation is less than the FMV in box 7, I have a negative number for income, and then a non-deductible capital loss. Question is if they had income would be taxable, but I guess no deduction since no income right?

you were working on in a previous question?

If the property is personal in nature there would be no loss/deduction allowed.

[Super Mom]

you were working on in a previous question?

If the property is personal in nature there would be no loss/deduction allowed.

Yes is same, but now I'm concerned, since FMV in box 7 is more than debt canceled, and it goes nowhere on return isn't IRS gonna think somethings wrong? And I'm wondering as I research why she even got a 1099 c. They are divorced and this is her name only, could the forgiven amount be halfed and box 7 not?????

[veritas]

Most likely

Yes is same, but now I'm concerned, since FMV in box 7 is more than debt canceled, and it goes nowhere on return isn't IRS gonna think somethings wrong? And I'm wondering as I research why she even got a 1099 c. They are divorced and this is her name only, could the forgiven amount be halfed and box 7 not?????

if the ex-spouse is on the loan he received the same thing. The mortgage company should report the entire amounts to both debtors.

So the IRS has the same information you do. That being the FMV is less than the debt discharged and it was a recourse loan. So no cancellation of debt income.

I would report the sale of the residence but not report a loss. Your software should be able to handle that. The IRS has no way to know if there is a gain or loss.

[David1980]

So the home was worth more than the loan?

Interesting, TTB 14-12 worksheet for foreclosures and repossessions is basically a copy of IRS Pub 4681 Table 1-1 with one potentially significant difference. Well, 4681 Table 1-1 also has a couple extra lines on part 2 to include any proceeds the taxpayer received from the foreclosure sale, but I've never seen a taxpayer receive proceeds on a foreclosure. The wording on line 1 though...

TTB uses the wording "Enter the amount of debt canceled by the transfer or property". IRS 4681 Table 1-1 uses the wording "Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property".

So, let's say the taxpayer has a loan and owes the bank $500,000. The home is worth $300,000 - that is the FMV. The bank forecloses and sends a 1099-C to the taxpayer for $200,000 - the debt canceled.

Which value do we use for line 1? I believe it should be the full $500,000 - the total amount of debt before the foreclosure.

[veritas]

The bank is going to send

So the home was worth more than the loan?

Interesting, TTB 14-12 worksheet for foreclosures and repossessions is basically a copy of IRS Pub 4681 Table 1-1 with one potentially significant difference. Well, 4681 Table 1-1 also has a couple extra lines on part 2 to include any proceeds the taxpayer received from the foreclosure sale, but I've never seen a taxpayer receive proceeds on a foreclosure. The wording on line 1 though...

TTB uses the wording "Enter the amount of debt canceled by the transfer or property". IRS 4681 Table 1-1 uses the wording "Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property".

So, let's say the taxpayer has a loan and owes the bank $500,000. The home is worth $300,000 - that is the FMV. The bank forecloses and sends a 1099-C to the taxpayer for $200,000 - the debt canceled.

Which value do we use for line 1? I believe it should be the full $500,000 - the total amount of debt before the foreclosure.

a 1099-C with the full amount of the loan which was cancelled, $500,000. The bank is forgiving in this example $200,000.

[David1980]

a 1099-C with the full amount of the loan which was cancelled, $500,000. The bank is forgiving in this example $200,000.

Will they report the $500k as the amount of debt canceled on the 1099-c?

http://www.irs.gov/pub/irs-pdf/i1099ac.pdf

"Box 2. Amount of Debt Discharged
Enter the amount of the canceled debt. See
Debt Defined
and
Exceptions
, earlier. The amount of the canceled debt
cannot be greater than the total debt less any amount the
lender receives in satisfaction of the debt by means of a
settlement agreement, foreclosure sale, a short sale that
partially satisfied the debt, etc."

It seems to me, the canceled debt would equal the total debt less the amount the lender receives (the home).

[Justataxguy]

Another One Related to Foreclosure

Client calls yesterday after picking up their amended 2013 return (son had another 1098-T from his previous college that "came late" or whatever) and had got an "Important Tax Return Document" (1099MISC) for "payment received as a result of an agreement between federal banking regulators and your mortgage servicer in connection with an enforcement action related to deficient mortgage servicing and foreclosure processes." yada yada yada........... The amount in box 3 (other income) is $3k. Does this just go on line 21 or are there other calculations that need to be made to determine tax liability?

[mactoolsix]

Client calls yesterday after picking up their amended 2013 return (son had another 1098-T from his previous college that "came late" or whatever) and had got an "Important Tax Return Document" (1099MISC) for "payment received as a result of an agreement between federal banking regulators and your mortgage servicer in connection with an enforcement action related to deficient mortgage servicing and foreclosure processes." yada yada yada........... The amount in box 3 (other income) is $3k. Does this just go on line 21 or are there other calculations that need to be made to determine tax liability?

We've seen two of these so far this year. Evidently some of the banks / mortgage companies are required to repay some charges that resulted from their foreclosures. They were both from 2 years prior, and we had did those returns too. We put the refund as other income line 21, and found no other relative changes.

Mike

[Justataxguy]

We've seen two of these so far this year. Evidently some of the banks / mortgage companies are required to repay some charges that resulted from their foreclosures. They were both from 2 years prior, and we had did those returns too. We put the refund as other income line 21, and found no other relative changes.

Mike

Thanks a lot!

[veritas]

I've had a shortsale

Will they report the $500k as the amount of debt canceled on the 1099-c?

http://www.irs.gov/pub/irs-pdf/i1099ac.pdf

"Box 2. Amount of Debt Discharged
Enter the amount of the canceled debt. See
Debt Defined
and
Exceptions
, earlier. The amount of the canceled debt
cannot be greater than the total debt less any amount the
lender receives in satisfaction of the debt by means of a
settlement agreement, foreclosure sale, a short sale that
partially satisfied the debt, etc."

It seems to me, the canceled debt would equal the total debt less the amount the lender receives (the home).

The only thing the bank reported on the 1099-C was the loan was recourse and the amount of debt forgiven since the short sale did not cover the entire outstanding loan.

[David1980]

The only thing the bank reported on the 1099-C was the loan was recourse and the amount of debt forgiven since the short sale did not cover the entire outstanding loan.

I think we're in agreement with that. Where we differ is on what exactly "the amount of debt forgiven" is? In my example, $500k balance on loan, $300k FMV, I believe the 1099-C will show $200k debt cancelled. It seems you're saying the 1099-C will actually report $500k for debt cancelled?

[veritas]

It would appear

I think we're in agreement with that. Where we differ is on what exactly "the amount of debt forgiven" is? In my example, $500k balance on loan, $300k FMV, I believe the 1099-C will show $200k debt cancelled. It seems you're saying the 1099-C will actually report $500k for debt cancelled?

you are correct.

I thank you for the conversation.