Form 1099-A & 1099-C

[JohnH]

There are several threads on this subject, but I haven't run across a precise answer to this question. My reading has led me to the following conclusions. But if anyone can point me in a different direction I'd appreciate the guidance. (Is it obvious yet that Oct 15 is approaching and some of us are circling back to those projects we and/or the clients have been putting off?).

Taxpayer's business failed in 2012-2013 and he & spouse ended up unable to make their house payments. They eventually moved out of the house in 2013 and went through a foreclosure. In 2014 they received two forms 1099-A (but as far as I can tell no 1099-C yet). The following figures are rounded.

The 1099-A forms each show the same info for Date of Lender's Acquisition as 3/10/14 and "Personally Liable" box checked. Both forms show FMV of the property as $350K. One form shows "Balance of Principal Outstanding" as $310K and the other shows $65K. The $310K was the original mortgage with no refinancing, and the $65K was a second mortgage used to pay some personal debts and to install a $40K pool. Original cost of the residence was around $400K.

Since they only have a 1099-A, are we supposed to only report the sale of the residence on the 2014 return, reporting the non-deductible personal loss? Seems as though there is enough info to also report the COD income, but it is my understanding that this is only done when the 1099-C arrives. I think there is $25K of COD income, which will likely be excluded under the insolvency exception.

Thanks for any input.

[TAXNJ]

LENDER and.....

Think two ways to handle:

1 - contact lender why form not sent

2 - reference Pub 4681. Consider file with cancelled debt (include form 982 if applicable) with an explanation.

[Lion]

Lenders have different amounts of time by state, as long as six years in some states, to decide to cancel the debt and no longer pursue it. They will/might issue the 1099-C when they write off the debt on their books. At this time, your clients still may be liable for the debt. They can contact the bank for more information.

[JohnH]

I'm wondering if that's what is going on in this case. The lending bank titled the residence in its name within a week of the date on the 1099-A, so there's no question the "sale" has taken place. It seems to me it would follow that the debt has been written off since they are not pursuing the client, but maybe not. Maybe the lender is waiting to see if they recover financially and can be tagged for some of the debt later on. In any event, I did take the advice to have the client call the lender and ask about the 1099-C. I think they are OK insofar as the tax situation is concerned because I have in hand clear information from their lawyer establishing insolvency. That's especially helpful since our NC state legislators, in their infinite wisdom, chose not to conform to the exclusion of COD income for principal residence debt beginning in 2014 (but thankfully they failed to remove the insolvency exclusion).

I really appreciate the guidance you are all giving me on this issue. Hope it's the last one I ever have to deal with. Each time I talk with the client on the phone, I can sense I'm taking them back emotionally to a devastating time in their lives - something they would like to put behind them as best they can.

[WhiteOleander]

Remember, insolvency in 2014 will not help for the 1099C. If the debt is cancelled at a future date, insolvency would have to be determined again on that date. I'm not so sure the lender will not sell the debt to a collector. That way they get something. At that point the debt is NOT cancelled. Then the t/p has the collection company coming after them for a long time til it's paid. In some states, they can sue the person and attach wages. Soc Sec. etc.

[JohnH]

Again, thank you for keeping me on track.
This debt forgiveness stuff is a huge mess.

If this client did not fall into "special circumstances", I would have sent them somewhere else at the outset.