Form 982 question.

[JG EA]

A client is filing a back tax year. Included in the infomation is a Form 1099A for a personal residence.The debt cancellation is more than the FMV. The original purchase price is less than the FMV.

I wanted to check on insolvancy, since the client was most likely in that situation. In getting ready to ask the client the questions I noticed the instructions for Form 982 states it has to be filed timely (or within 6 mo), and this is a 2000 return. Does that mean Form 1099A has to be included in income and insolvancy can't be used?


Thanks!

[taxmandan]

Insolvency issue

File the return, include the 982. If it flies, you'll be a hero, if not, nothing ventured, nothing gained. Theirs approach is to disallow the 982 and you have to fight to get it back, in audit. Get all the paperwork: bank statements, bills, debts listed, etc. ready NOW, your client WILL have to prove insolvency!

Daniel

[jimmcg]

jim mcg

I have found it useful to prepare a taxpayer balance sheet immediately before the debt forgiveness and immediately after the debt forgiveness and present this to the Service as proof of insolvnecy...... Works for me! .... Of course you will need proper documentation for all numbers.

[JG EA]

Thanks, but

... the instructions for Form 982 states it has to be filed timely.

This 2000 return is being prepared required by court. I don't want to ignore this rule. I don't thoroughly understand this area and wanted to know if there was any other way to claim insolvency.

Another little wrinkle is the box on recourse, nonrecourse is not checked. The client does not know if liable for the loan or not.

[jainen]

debt cancellation

Tax attributes are not the same as taxable income. They are things like general business credits, capital loss carryovers, and basis of property. These are usually reduced by excluding income from debt cancellation, but in some cases you can hang on to them. I'm guessing that your client is not a business and doesn't much care about tax attributes.

The amount of debt cancellation you can exclude is limited to the amount by which liabilities exceed assets. Since the mortgage was greater than FMV you might get some relief, depending on other debts and assets, but not 100%.

In my state (California) a mortgage is BOTH recourse and non-recourse. If a bank goes to court they can enforce the full amount of the promissory note against the borrower. It's easier and much more common to simply foreclose on the deed of trust although that limits them to the property itself. In your case they didn't take the property so obviously it was the personal note that was cancelled.

[JG EA]

What I did

I checked with NATP. And they felt that indeed insolvency could not be claimed at this late date. (Hope they are right).

Yes, this personal residential property was taken back for the remaining mortgage. Since the box was not checked to show recourse or non recourse I assumed in the client's favor. The client also had some other information that we could assume nonrecourse.

So the loan's remaining balance became the sales price and the basis in the hands of the client was the cost = capital gain.

CFS has a great worksheet. I worked all four possible combinations and the conclusion was if nonrecourse = capital gain, if recourse = part capital gain, part ordinary gain.