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    #1

    1099C for mortgage deal

    Client got a chance to buy a home that he liked at a good price. So he called the company that held the mortgage on his mobile home to see what could be worked out. Right up front they told him that they had a "Keys for Cash" program. They said that if he would turn over the keys to the home, the debt would be cancelled. They did not mention that they would be issuing a 1099C for the $65,000 being cancelled.

    There was no 1099A issued and the mortgage company plays dumb when he tries to talk to them.

    Since they took the home as an even exchange, should there not be some way that this is not an income to him and if so, how do I process it?

    Thanks.
    LT
    Only in government or politics is a "cut in spending" really an increase. It's just not as much of an increase as they wanted it to be, therefore a "cut".
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    #2
    Originally posted by thomtax View Post
    They did not mention that they would be issuing a 1099C for the $65,000 being cancelled.
    Would it really have mattered whether they issued a 1099C or not? I suppose it would, in the same way a business that receives cash doesn't have to report it.

    Originally posted by thomtax View Post
    Since they took the home as an even exchange, should there not be some way that this is not an income to him and if so, how do I process it?
    Well they may have made the deal an even exchange with the taxpayer but still written off a loss on their end. The important amount to find out how much the balance of debt outstanding was and the fair market value of the home at the time the deal was done. If the balance of debt outstanding was $165,000 and the home was worth $100,000 a 1099-C for $65,000 makes absolute sense. If the balance of debt was $65,000 and the home was worth $65,000 (or more) then the 1099-C makes no sense. They have an option to enter the FMV on the 1099-C (though it isn't always right) - good starting point. Did they report FMV on 1099-C? If not, you'll have to get that somewhere else (county tax assessed value?) You'll also have to get the balance of debt somewhere else as well, as the 1099-C shouldn't report that amount - they should be only reporting the debt cancelled after accounting for property received (the home).

    So, let's say the $65,000 represents the debt owed that exceeds the FMV of the mobile home (this is what the 1099-C /should/ show, though they don't always get it right...) Can they avoid treating it as income? Sure. What year did this happen? If 2013 you could use the principal residence indebtedness exclusion on form 982. Only works for debt used to buy/build/improve the home. Probably that's all of it, but if they refinanced and pulled money out for other purposes it wouldn't apply to that debt. If 2014 that exclusion doesn't exist - expired at end of 2013. They could also exclude the cancellation of debt income using insolvency, if they are insolvent to 65k at least. Both exclusions detailed in publication 4681.

    Comment

      #3
      Would it really have mattered whether they issued a 1099C or not? I suppose it would, in the same way a business that receives cash doesn't have to report it.

      Yes, it definitely would have. They were not that unhappy, just got offered a good deal by someone needing to move. The sales person presented it to him as an even exchange. Doesn't mean it was, probably means they had no idea and too lazy to check with someone who knew. This client is one who ordinarily tries to get into detail on things. Otherwise, I would be skeptical.

      FMV was left blank on form and repeated calls to company achieve nothing.This was in 2013. They went to another company to finance the new home.

      LT
      Only in government or politics is a "cut in spending" really an increase. It's just not as much of an increase as they wanted it to be, therefore a "cut".

      Comment

        #4
        It WAS an even exchange. Your client did NOT have to pay any more money to his mortgage company.

        However, he was relieved of some debt that he legally owed. That's as if the mortgage company PAID HIM some money. So, yes, he does have to pay tax on it, if it doesn't qualify for an exclusion via short-term laws, bankruptcy, insolvency, etc. Even partial insolvency could help him owe less taxes.

        Your client does need to fill in the holes in the information for you to do your best job for him.

        Form 1099-A reports the "sale" to your client. A company does not have to issue 1099-A if they are issuing a 1099-C that same year.

        Form 1099-C reports the cancellation of debt. Depending on the state, the mortgage company can take several years to officially cancel the debt, so your client may end up reporting the COD in a later year than he reports the sale.

        Make sure your client gives you ALL the paperwork, documents, letters, emails, etc., about this deal.

        Comment

          #5
          As was mentioned, they probably qualify for the Qualified Principal Residence Indebtedness or Insolvency exclusion.

          IRS Courseware - Link & Learn Taxes
          http://apps.irs.gov/app/vita/content/36/36_03_025.jsp?level=advanced
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          http://www.irs.gov/pub/irs-pdf/p4681.pdf#page=5



          If those don't apply, was it a non-course debt? look at box 5 and if it was in a non-recourse state not. If it was a non-recourse debt, they is no cancellation of debt BUT the home is 'sold' for the FULL amount of the debt. However, the Section 121 Principal Residence exclusion usually eliminates any gain.

          http://www.forecloseddreams.com/recourse_states

          IRS Courseware - Link & Learn Taxes
          http://apps.irs.gov/app/vita/content/36/36_02_022.jsp?level=advanced
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