Selling home with reverse mortgage

[thomtax]

Surviving spouse has remarried. The couple lived in a small town where the real estate prices have tanked. The reverse mortgage was set up based on a $140,000 basis. Real estate people say that homes like this are now selling for around $65,000. The RM company has paid out more than the house will probably sell for.

Does anyone know if there will be a 1099C issued for the difference?

And will there be any tax consequences from this shortfall?

As usual, thanks for all help.

LT

[Roland Slugg]

Well, it's impossible to know if a 1099-C will be issued, but if the house is sold for less than the amount of the loan, and the borrower doesn't pay the difference, then one should be issued by the lender. The lender may issue a form 1099-A instead, or it might even issue both forms.

Since a reverse mortgage loan is a hard money loan, the COD amount should be reported as income on the borrower's tax return unless bankruptcy or insolvency applies. If a 1099-C is received and the amount reported includes accrued interest, the interest portion is not reportable as income, since the borrower did not pay or deduct it. If other costs such as mortgage insurance or service charges are included in the amount reported on form 1099-C, they are not reportable as income either.

[buzzardbreath]

No 1099C or 1099A

Thom, I haven't read in your original post where this person has stopped repaying, even as bleak as the situation may be.
You leave to the imagination whether this guy is going to move out because he is getting married or for any other reason.

Unless there is a default, there is no 1099-C

[MDEA]

reverse mortgage

There are no payments with a reverse mortgage. In most times both husband an wife are deceased and I have never seen any paper work issued.

[Gary2]

Don't let the reverse mortgage aspect derail you. It sounds like a short sale - they're going to sell, and the sale price won't cover the outstanding balance of the mortgage and associated lien.

Usually on a short sale, they'll agree to cancel the deficiency at the closing. If so, this will be canceled debt income, unless an exception or exclusion applies, but as pointed out, the interest is handled separately.

However, this isn't always the case. I've seen short sales coupled with a payment plan for the deficiency. You'll need to check the documents to be sure. There could be a partial cancelation now (which should trigger a 1099-C and CODI now), or a contingent partial cancelation in the future (which won't trigger the canceled debt until the contingency is met), or a payment plan written with the intent that the entire amount will be paid off with no canceled debt.

Finally, a short sale may result in a 1099-S, but shouldn't trigger a 1099-A (though you'll sometimes see them anyway).

[AZUKHiker]

Non recourse debt

I can't see why a 1099-C would be issued. The whole point of a reverse mortgage is that you get a lump sum up front, no monthly mortgage repayments and the lender takes the risk that they will recover all the debt when the property is sold. That is why the principal on a reverse mortgage will be way below (50% to 60%) of the FMV when the mortgage is taken out so that the lender has a cushion to cover the rolled up interest and ultimate repayment.

So I see this as non-recourse debt, so no 1099-C. The proceeds of the sale of the property would be at the value of debt when the property is sold. As it is most likely to have been a main residence s121 would apply to any gain.

Finally don't forget that there will be potentially a big mortgage interest deduction in the year of sale as the interest is only paid when the property is sold.

[thomtax]

Thanks for all the helpful advice, everyone.

If I am reading you correctly, there are correct ways for the RM company to handle things, but they are not always followed.

As the old saying around here says "You pays your money and you take your chances"

LT

[Gary2]

I stand corrected on the point that reverse mortgages are generally non-recourse mortgages.

[Zee]

Most reverse mortgage loans are considered “non-recourse loans and promise that no deficiency judgment can be obtained against the mortgagor or heirs. However, the “no liability” promise does not extend to income tax consequences to borrowers or successor owners of the property who receive their ownership as the direct result of the death of the borrower.

Reverse mortgage proceeds can become taxable if any portion is forgiven by the lender. If nonrecourse debt is forgiven in a transaction other than sale such as loan modification, it will generally have the same tax ramifications as the forgiveness of recourse debt which is taxable as ordinary income under Section (§) 61(a)(12) of the 1986 Internal Revenue Code as Amended (IRC). A portion or all of the resulting income may be excludible under IRC § 108.

I'd also guess that interest on the loan would be applied first to the outstanding balance which might result in a sustantial interest deduction if itemizing.