New Cancellation of Debt Provision

[jrucpa]

I have a client (parents) who purchased a home for her daughter. Parents were on both the loan and the deed as daughter did not have appropriate credit. Loans (1st and 2nd) were for $350K and the home will be foreclosed on at about $220K. This will result, if I am right, with a 1099 being issued by lenders for $130K cancellation of debt. Parents are an 80 year old couple that do not have the money to pay the taxes on this. All they have is their primary residence.

1. Since it is not the borrowers primary residence the cancellation of debt income cannot be excluded under the new law.
2. Since the 80 year old couple have a home that is fully paid for, they are not insolvent and so cancellation of debt income cannot be excluded.

Any thoughts about what this poor 80 year old couple should do. Do I just try to negotiate with the IRS and hope they will give them a break?

Thanks for your help.

[solomon]

If you could prove the daughter was the beneficial owner, namely, had the burdens and benefits of ownership perhaps the residence could be construed as hers.

Did the daughter make the mortgage payments directly to the lender? How about the taxes, upkeep, and all other expenses?

[jrucpa]

Cancellation of Debt Income

Yes, the daughter made all the payments but was not on deed or loan. She also paid for all upkeep.

[solomon]

Here is a link to an article on the topic. Read the cited court cases and you will have a feeling if your case applies.

http://www.taxalmanac.org/index.php/Equitable_or_Beneficial_Ownership