Surplus funds sent to clients whose home was foreclosed

[Taxadvisor VA]

Clients received a check in excess of $7K with a note from the attorney “This check represents the surplus funds available as a result of the foreclosure sale conducted on the aforementioned property." (Property was their primary residence). I just spoke to the Attorney assistant who said these funds were available after the first deed of trust was paid off. Clients did file for bankruptcy and the home was foreclosed but sold it appears favorably.

Facts:
1) 1099A is from Federal National Mortgage and not Wells Fargo who was the lender. I'm assuming this is b/c it was a bankruptcy.
On the form the numbers have to be wrong:
Box 2 Balance of principal outstanding is $16,166.88
Box 4 FMV of the property is $19,000. I went to check at zillow.com the FMV for the month this property was acknowledged as an abandonment - July 2013 and $205,000 was the FMV. Now the county had $169,000 as the FMV. Thus, my conclusion that the numbers are wrong. I know Zillow may not be the most accurate but in this case it at least does provide a ball park figure. The county assessments are usually lower than FMV which is the case here.

Okay---- No 1099 for this $7K + check has been issued. I'm thinking that this may not be income b/c the bank was fully paid for the mortgage balance due and the property was sold for $190,000.

Has anybody has experience with a situation such as this?
Let me know.
Thanks,
Taxadvisor VA

[David1980]

So it does happen!

Table 1-1 in pub 4681 line 5 "Enter any proceeds you received from the foreclosure sale" used in calculating the gain or loss. I always laughed about that line because who gets money back on a foreclosure? Well, someone apparently. So sell price will probably be the balance of loan outstanding (whatever the real amount was) + the proceeds instead of the FMV (seems unlikely FMV would be less than balance of debt if they got money back). Which, probably won't matter because either they won't have a gain or the section 121 exclusion will cover the gain.

One does wonder about the proceeds and the bankruptcy and how that interacts.

[Taxadvisor VA]

Surplus funds from foreclosure

David1980:
Thank you for your help, as this is seemingly complicated.

I found the Publ 4681 and the table that you referred to. In a nutshell, you are actually saying treat this as a sale of a primary residence and use the exclusion 121 to offset the gain. They definitely qualify b/c they did own it and use if for 2 out of the last 5 years. In fact, they purchased the home for $100K in June 1994 for a $100K. We estimate that they put $25K in improvements over the course of their pownership. Updated cost basis = $125K.

The 1099-A actually shows:
Box 2 Balance of principal remaining $16,166.88 ( My client told me that mortgage debt was closer to $186K)
Box 4 FMV is listed at $19,000 (Zillow.com had $205,000) I would like to know where this amount came from. We do know that the home was sold for $190K.

They did file for bankruptcy Chapter 7 and it was granted by the courts on 11.19.12.

When I called the Attorney assistant who said when the 1st deed of trust was paid off that surplus funds existed which were sent to my clients. I agree with you in that how in the world do you go through a foreclosure and receive money.

At this point, I am still confused as to how to enter this in the tax return.
Any ideas?

Thanks so much,
Taxadvisor VA