A client bought a timeshare - 2 months later, had regrets and got out of it by agreement with the company and turning the deed back over to them. Now, she has received a 1099C for $20,000 which is the same amount that they have put in box 7 as fair market value. I have found the following from the IRS - which makes me feel that this should not be taxable income. But, in that case, how do I report it on his taxes? Anyone run into this before?
IRS:
"If your property was subject to a recourse debt, your amount realized is the fair market value (FMV) of the property. Your ordinary income from the cancellation of the debt is the amount of the debt in excess of the FMV of the property that the lender forgives. You must include this cancellation of debt in your income unless an exception or exclusion, discussed below, applies. The difference between the FMV and your adjusted basis (usually your cost) will be gain or loss on the disposition of the property.
If your property was subject to a nonrecourse debt, your amount realized is the entire amount of the nonrecourse debt plus the amount of cash and the FMV of any property you received. You will not have ordinary income resulting from debt cancellation.
The examples below show the difference between how recourse and nonrecourse debt is treated.
You bought a boat for personal use for $20,000, paying $2,000 down and signing a recourse note for $18,000. After paying down $4,000 on the note, you are no longer able to make payments. The boat dealer repossesses the boat, which is now worth $11,000. You will have ordinary income from cancellation of debt of $3,000 ($14,000 remaining debt owed minus $11,000 FMV of boat). You will have a $9,000 loss on disposition of the boat, the difference between the boat’s FMV of $11,000 (the amount you realized on repossession) minus $20,000 (your adjusted basis in the boat).
The facts are the same except that you signed a nonrecourse note when buying the boat. When the dealer repossesses the boat, you will have a loss of $6,000, the difference between the $14,000 amount realized (the face amount of the remaining debt) and $20,000 (your adjusted basis in the boat). You have no ordinary income from cancellation of the debt."
IRS:
"If your property was subject to a recourse debt, your amount realized is the fair market value (FMV) of the property. Your ordinary income from the cancellation of the debt is the amount of the debt in excess of the FMV of the property that the lender forgives. You must include this cancellation of debt in your income unless an exception or exclusion, discussed below, applies. The difference between the FMV and your adjusted basis (usually your cost) will be gain or loss on the disposition of the property.
If your property was subject to a nonrecourse debt, your amount realized is the entire amount of the nonrecourse debt plus the amount of cash and the FMV of any property you received. You will not have ordinary income resulting from debt cancellation.
The examples below show the difference between how recourse and nonrecourse debt is treated.
You bought a boat for personal use for $20,000, paying $2,000 down and signing a recourse note for $18,000. After paying down $4,000 on the note, you are no longer able to make payments. The boat dealer repossesses the boat, which is now worth $11,000. You will have ordinary income from cancellation of debt of $3,000 ($14,000 remaining debt owed minus $11,000 FMV of boat). You will have a $9,000 loss on disposition of the boat, the difference between the boat’s FMV of $11,000 (the amount you realized on repossession) minus $20,000 (your adjusted basis in the boat).
The facts are the same except that you signed a nonrecourse note when buying the boat. When the dealer repossesses the boat, you will have a loss of $6,000, the difference between the $14,000 amount realized (the face amount of the remaining debt) and $20,000 (your adjusted basis in the boat). You have no ordinary income from cancellation of the debt."
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