Foreclosure

[AZ-Tax]

Oct 1st new bill to go into effect?

Got a client that called up and wants to know the tax ramifications of foreclosing on his house opposed to "shot selling" it based on the new bill that takes effect on Oct 1st.

Anyone have any idea?

[David1980]

I think because the 1099A would read somewhat like a 1099B to the IRS computer. The FMV would be the sales price of the property. So, if it is not reported correctly on the Sch D with the basis, the IRS wants tax on that amount. If it is a personal residence, the Sec 121 could be used if available to the t/p. Or if it's a business property, it would have to be handled that way.

Hmm, that would be principal outstanding instead of FMV (per IRS Pub 523) but yes, I see your point. It may be that they're simply looking for a Schedule D item showing the gain or lack thereof for that item. Just like when a 1099-S is received.

[WhiteOleander]

IF the IRS received only a 1099-A on a personal use item, there is [at least not yet] no cancellation of debt.

But, if all the IRS received was a 1099-A, why did they issue a letter stating the taxpayer received income? I would like to read that letter from the IRS and pull a transcript to find out what's what.

I think because the 1099A would read somewhat like a 1099B to the IRS computer. The FMV would be the sales price of the property. So, if it is not reported correctly on the Sch D with the basis, the IRS wants tax on that amount. If it is a personal residence, the Sec 121 could be used if available to the t/p. Or if it's a business property, it would have to be handled that way.

[travis bickle]

I think you are right.

Interesting that the only thing sent to the IRS was a 1099-A. I was under the impression that without Form 1099-C there is no cancellation of debt income. Just the gain or loss from the property, with the cancellation of debt coming when the bank issues the 1099-C. And if the taxpayer was not personally liable for the loan that suggests the loan was in someone else's name anyway and the cancellation of debt would go to that person, I would think?

IF the IRS received only a 1099-A on a personal use item, there is [at least not yet] no cancellation of debt.

But, if all the IRS received was a 1099-A, why did they issue a letter stating the taxpayer received income? I would like to read that letter from the IRS and pull a transcript to find out what's what.

[David1980]

Interesting that the only thing sent to the IRS was a 1099-A. I was under the impression that without Form 1099-C there is no cancellation of debt income. Just the gain or loss from the property, with the cancellation of debt coming when the bank issues the 1099-C. And if the taxpayer was not personally liable for the loan that suggests the loan was in someone else's name anyway and the cancellation of debt would go to that person, I would think?

[bobbykorey]

Hi Michael,

As Travis said it is better to consult a professional for your situation as every case differs a lot in every way... I am sure you will find a solution... All the best...

[travis bickle]

Unfortunately,

My house was foreclosed in 2006. I did not file in 2006 as I had no income. I recently received a letter from the IRS that I had income in 2006 due to the foreclosure. They also sent a copy of a 1099-A which shows a principal balance of 75,072 and a fair market value of 24,900. I read the publications they sent and am confused how to figure out the gain/loss. If I'm reading it correctly, since I was not personally liable for the repayment of the debt the gain would equal to principal balance less what I paid for the house. The publication also mentioned something about there being no tax on the gain if I was insolvent (which I was). Is my calclaution of the gain correct and how do report this?

Thanks.

the way the laws are written you DID have income in 2006. When you were foreclosed, a certain amount of debt was "forgiven" [even with the house being taken]. That amount of money MAY be income for you.

This board is really for questions exchanged between tax professionals, and is not a "Mr. Taxman Says . . ." site.

Each situation is unique and we cannot discuss them here. Also there may be state tax ramifications for you. You will need to consult with a tax specialist in your area [seek either a CPA or EA or Tax Lawyer]. Interview the person you select and make sure they have experience in your particular area [99.99% of them will]. Then go over the details with them.

They will explain how you calculate insolvency in IRS terms. The amount of insolvency may be enough to wipe out any income you received in 2006 which also means it would wipe out any income tax liability.

Seek out competent help quickly, do not ignore the IRS "respond by" date.

Best of luck

[pmichael]

My house was foreclosed in 2006. I did not file in 2006 as I had no income. I recently received a letter from the IRS that I had income in 2006 due to the foreclosure. They also sent a copy of a 1099-A which shows a principal balance of 75,072 and a fair market value of 24,900. I read the publications they sent and am confused how to figure out the gain/loss. If I'm reading it correctly, since I was not personally liable for the repayment of the debt the gain would equal to principal balance less what I paid for the house. The publication also mentioned something about there being no tax on the gain if I was insolvent (which I was). Is my calclaution of the gain correct and how do report this?

Thanks.