Client received 1099 A on home. FMV(160,000) is more than debt balance(125,000). If cost of home was $100,000, is there taxable gain? what about the exclusion of gain on home lived 2 out of last 5 years. Does the 121 section come into play into this? If cost of home was more than debt balance (130,000), there would be non deductible personal loss? I have been searching, googleing, but some things aren't as clear as I'd like.
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(1) If cost of home was $100,000, is there taxable gain?
Yes, there is a gain, but it may not be taxable (see next point).
(2) Does the 121 section come into play into this?
Yes, the 2 out of 5 year §121 rules apply to exclude the gain. So if they qualify, there would be no tax owed.
(3) If cost of home was more than debt balance (130,000), there would be non deductible personal loss?
In this situation, yes. The 1099-A basically means your report it as a 'sale'. For a non-recourse debt (usually no check-mark in box 5), the 'sale price' is the amount of debt ($130,000 in this situation). However, most debts are recourse debts (usually box 5 is checked). The 'sale price' for a recourse debt is the LOWER of the amount of debt and the Fair Market Value ($130,000 in this situation).
Usually (especially in recent years), the Fair Market Value is less than the amount of debt. Out of curiosity, why did the taxpayer 'abandon' the property if the Fair Market Value was greater than the debt? Was there a second mortgage mortgage? -
since debt balance (130.000) is more than cost of home (100,000), there probably was a home equity loan taken out and maybe purchased a new car, or paid off old debts ( haven't got the whole story yet). If TP lived in the home for qualifying time, does that make any difference? I know it doesn't in a normal sale because of the 121 exclusion, but is an abandonment different? I read some examples in the pubs and this was mentioned, but not the fact that the TP lived in the home. I'm a little confused. thanks for any helpComment
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Sorry, I'm not quite sure what you are asking.
Report the 'abandonment' as a sale of the home on Schedule D. You will report the $100,000 basis and a 'sale' price of $130,000. If the taxpayer qualifies for the §121 exclusion, that will eliminate the $30,000 gain. However, because they received a 1099-A, the IRS will be 'looking' for it and it should still be reported on Schedule D.
Does that answer your question? If not, can you please clarify?Comment
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"Sale" price on non-recourse debt foreclosure
I believe that the "sale price" on foreclosure of a non-recourse debt is the GREATER of FMV or outstanding loan balance.Evan Appelman, EAComment
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Personally liable for debt, so then outstanding debt?Comment
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I don't think so. This page says:Originally posted by appelman View Post
"The amount realized includes the balance of the nonrecourse debt at the time of the disposition of the property. This is true even if the FMV of the property is less than the outstanding debt."
And this page says:
"If the taxpayer is personally liable, the sale price is the lesser of the balance of the principal mortgage debt outstanding or the fair market value
If the taxpayer is not personally liable, then the sale price is the full amount of the outstanding debt, as reflected on Form 1099-A
For both recourse and nonrecourse loans, add any proceeds the taxpayer received from the foreclosure sale to the amount realized"
Comment
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When in doubt read the manual...or The Tax Book
1. Thread creator may find TTB Pp. 14-10/14-14 helpful. The scenario as stated may need some aplification as to the TP's basis in the property (as opposed to mortgage debt).
2. It is possible (probable?) that a 1099-C is either floating around (misplaced by the client/taxpayer) or forthcoming. Thus, this would be a good time for the taxpayers to complete an insolvency worksheet (TTB P. 14-13, right column, top of the page) and IRS form 982 (recently revised).Friends double; family triple. Don't buy an audit for yourself. If someone has to go to jail make sure it is the client. Remember it is only taxes, nothing important.Comment
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how did they pay 100k and end up with 130K in debt? Did they refi along the way? Did they use the refi to improve the home? Did they do anything that would increase their basis?Believe nothing you have not personally researched and verified.Comment
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If section 121 applies (2 of 5, etc.) I wouldn't bother worrying about it further than that. Yes, it definitely has a "But that doesn't seem fair!" aspect to it, but so what? OK, taxpayer uses their mortgage to get a home equity loan to buy a nice $25,000 sailboat and ends up owing $125,000 when they originally only paid $100,000. They then abandon the home and get out of the debt. It "feels" like they should have to pay tax on that $25,000. Let's change the facts up a bit. Taxpayer doesn't take out any equity loan. Instead, he sells the home for $125,000 when his cost was $100,000 and makes $25,000 off the sale. He then uses the $25,000 to buy a nice $25,000 sailboat. Same results, right?Comment
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