Gloria

Divorced taxpayers had a rental that was foreclosed. The home was rented for about 10 years thru December 2007; the X-husband took possession of the home in January 2008 and lived in it for a year and a half and then let it foreclose. The home remained in the names of both taxpayers and they both received a 1099-A from Chase Bank. The female taxpayer wants to report her share of the gain on the disposition of the rental property. The house has not been a rental since December 2007. What would be the best method of reporting the taxpayer's share of the gain on the disposition? Would I use Form 4797 and select that it was a rental? How would I report her share only without it creating problems for her if her X-husband does not report his share? She brought me the 2007 tax return which was the last year they filed together. Also am I calculating the basis correctly based on the instructions for determining gain or loss on foreclosure for recourse loans? THANKS IN ADVANCE FOR YOUR COMMENTS.

Determining Gain or Loss on a Foreclosure

For recourse loans, the figure used as the selling price is the lower of the following two amounts:

1) the outstanding loan balance immediately before the foreclosure minus any debt for which the borrower

remains personally liable after the foreclosure; or

2) the fair market value of the property being foreclosed.

INFORMATION FROM 1099A - RECOURSE

Balance of Principal Outstanding -- 99,137.87

FMV - FROM 1099A -- 47,000.00

CALCULATE BASIS - LOWER OF THE 2

FMV 47,000.00

LOAN BALANCE 99,137.87

LESS FMV (47,000.00)

BALANCE 52,137.87 PERSONALLY LIABLE--IS THIS THE WAY TO CALCULATE?

FMV IS LESS 47,000.00

ADJUSTED BASIS (34,160.00)

GAIN-100% 12,840.00

KC,

Keep reading. Page 7 in the pub there is an exception for real estate used in business. There is an example of a store owner who gets a loan modification and keeps his store, but reduces his basis in the building. Files form 982 and reduces tax attributes (basis). There is some debate over rental real estate being a trade or business. I fall in the camp that it does. It is a profit motivated venture.

I say the example in the pub fits Deb's situation based on her limited information posted.

Tom

Lodi, CA

Tom, in reading your comments above, I was hoping that rentals of real estate would fall under a "trade or business" but that is not the case based on the following:

Publication 925 - Main Content

Trade or Business Activities

A trade or business activity is an activity that:

• Involves the conduct of a trade or business (that is, deductions would be allowable under section 162 of the Internal Revenue Code if other limitations, such as the passive activity rules, did not apply),

• Is conducted in anticipation of starting a trade or business, or

• Involves research or experimental expenditures that are deductible under Internal Revenue Code section 174 (or that would be deductible if you chose to deduct rather than capitalize them).

A trade or business activity does not include a rental activity or the rental of property that is incidental to an activity of holding the property for investment.

I found another article --this leads me to assume that Form 1099-A is also used to report cancelled debt--see last sentence.

FROM IRS WEB PAGE

Topic 160 - Form 1099-A (Acquisition or Abandonment of Secured Property) and Form 1099-C (Cancellation of Debt)

If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the canceled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven or the property is abandoned or foreclosed, the amount you received as loan proceeds is reportable as income. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-A, Acquisition or Abandonment of Secured Property, or Form 1099-C, Cancellation of Debt.

Don't assume anything. I have seen situations where a 1099-C was issued and not a 1099-A and that is what the instructions you were referring to indicated, however I have not seen a situation where the client was liable for the debt (Recourse Loan) that received only the 1099A. I do believe that until you see the 1099-C you do not include anything in income. Only report the transaction as a sale at this point.

Again, I could be wrong, but I've seen a lot of these and the only ones I didn't see a 1099-c on was when the client had a non-recorse loan.

Deb!

Thanks Deb, I need more reassurance,

I am working on the returns for 2008 & 2009 for T/P. T/P received the 1099-A for a property that foreclosed on June 12, 2008 (American Home Mortgage Servicing) for a recourse loan. For the year 2009, T/P has five 1099-C's for loans that Wachovia agreed to reduce at her persistence. All properties are rental properties and the loans are recourse loans. Client had 14 properties. Four properties foreclosed in 2008 (I have not seen the balance of the information for 2008 for the other foreclosures as she accidentally left a folder behind at her home). T/P is working with other banks to reduce the loans on 4 or 5 more properties.

The Instructions to Borrower on the back of 1099-A for box 4 states: Box 4: Shows the fair market value of the property. If the amount in box 4 is less than the amount in box 2, and your debt is canceled, you may have cancellation of debt income. If the property was your main home, see Pub 523, Selling your home to figure any taxable gain or ordinary income.

I am concerned that if I do not report the ordinary income (especially if she only has 1099-A's for the other 3 properties as well) that she may have problems when the IRS does their matching in the future. T/P would be much better off if the ordinary income is not included. This is my first return involving foreclosures and cancellations of debt for recourse loans. If I report the sale only, she will have a loss. If I report the ordinary income as well she will have a gain. SO IF YOU CAN, PLEASE REASSURE ME ONE MORE TIME, THAT I CAN LEAVE THE ORDINARY INCOME OUT UNTIL T/P RECEIVES A 1099-C. THANKS.

>>Thank you Frazzled but I do not think a 1099-c is issued after a 1099-a (acquisition or abandonment of secured property)is issued. I think I found the answer--I enter the ordinary income on line 3 of the Schedule E.<<

I am curious as to where you found this answer.

taxbilly

Taxbilly,

Following is the information:

From Publication 544 - Sales and Other Dispositions of Assets

Forms 1099-A and 1099-C. If your abandoned property secures a loan and the lender knows the property has been abandoned, the lender should send you Form 1099-A showing information you need to figure your loss from the abandonment. However, if your debt is canceled and the lender must file Form 1099-C, the lender may include the information about the abandonment on that form instead of on Form 1099-A (I am assuming that if the information is already included in the 1099-A a 1099-C may not be issued)

Regarding where to record the ordinary income: Publication 4681 - canceled debts: Chapter 1, Page 3.

Schedule E (Form 1040), line 3, if the debt is related to a nonfarm rental activity

there is not any income to include on line 21 until the debt has been cancelled (1099-C). With a 1099-a you just report the sale and advise the client that a 1099-c might come in another tax year. I think the financial institution has 3 yrs to make that cancellation of debt determination.

Thank you Frazzled but I do not think a 1099-c is issued after a 1099-a (acquisition or abandonment of secured property)is issued. I think I found the answer--I enter the ordinary income on line 3 of the Schedule E.

Client received a 1099-A for rental property that was foreclosed. Would the transaction result in an entry on Form 4797 and an entry on line 1040 line 21 as listed bellow? I am not sure if part of the entry is reported on Line 21 of the 1040 or elsewhere. Thanks in advance for your input.

1099-A RENTAL PROPERTY

$212,164.40 Box 2 - Balance of Principal Outstanding

$168,300.00 Box 4 -Fair Market Value of Property

$222,621.00 Adjusted Basis of Property

$212,164.40 Amount from Box 2

($222,621.00) Adjusted Basis of Property

($10,456.60) Loss Form 4797--Sales of Business Property

$212,164.40 Amount from Box 2

($168,300.00) Amount from Box 4

$43,864.40 Ordinary Income -- Other Income Line 21-1040

Do you have the 32 bit or 64 bit Windows 7? I am buying a new computer and have to decide between the two operating systems, and am wondering about the rollover process if I get the 64 bit, as well as the functionality with the 2007 & 2008 programs. I called ATX and they thought that the 2007 & 2008 would run on the 32 bit but not on the 64 bit. But since 64 bit is the 'wave o the future', and I keep computers a long time, I don't want to be obsolete right out of the gate if possible.

I have the 64 bit and had no problems.

Anybody know what the planned released date is? Thanks. Also anybody planning to run the program on the New Windows 7 version and if so which one?

I upgraded from Windows Vista to Windows 7 and I have openned a few returns just to see if the program continued to work and it did. I did encounter one problem. I have two printers that are Brother Printers and they do not work with Windows 7. I went to the Brother Web Page and they have a long list of printers that do not currently work with Windows 7--they are expecting to have the drivers ready at the beginning of next month.

Have any of you found a good source of reference for Solar Energy credits - as far as how many years the credit can be carried forward for residential credits (the credit is 30% of costs less other state rebates, etc)? I attended a solar energy presentation and in one of the slides they indicate that the credit must be used in two years and to contact a CPA with any questions.

I found an article prepared by the SEIA (Solar Energy Industries Association) regarding the Federal Solar Energy Incentives and Question 5 of their Frequently-Asked Questions (see bellow) indicates that the credit can be carried forward at least until tax year 2016. Do any of you have clients that will be taking the credit next year? If so, have you found any other references? You comments will be appreciated. Thanks.

Federal Solar Energy Incentives

FrequentlyAsked

Questions (FROM SEIA –SOLAR ENERGY INDUSTRIES ASSOCIATION).

5. If I don’t have enough tax liability to take the full tax credit in the year my system is installed, can I apply the remainder of the credit to the following years’ taxes?

Unused commercial credits can be carried forward for up to 20 years. Unused residential credits can be carried forward at least until tax year 2016 (the year the residential credit expires). It is unclear whether residential credits can be carried forward past 2016.

>>the house "really" belongs to the parents<<

I hope you don't say that to your clients, because it is wrong. They could have avoided probate by putting the house into a living trust. Instead, they chose to make their son a co-owner.

No -- actually I spoke with them (the parents & son) and I told them that more than likely the son would not qualify because he was on the title - but that I would do some research. What is ironic is that last year they were thinking about preparing a living trust (they had ordered the Suzie Orman living trust kit--I know because I borrowed the book and the disk---the disk can be legally shared with friends). Instead they added the son to the title---Anyway that was an $8,000 mistake.

Seems pretty clear to me.

Thanks -- It is clear but I wanted to double check with this board's expertise being that the house "really" belongs to the parents but I guess "legally" it belongs to the son as well. Thanks again.

Sounds like the son has an ownership interest in the home that was his principal residence. Did the parents file a gift tax return?

No -- I do not know much about gift taxes. The parents are still the owners and are still listed on the title; they added the son's name to the title. So would there still be a gift tax?

A taxpayer purchased a home and last year the parents added the son's name to the title (to avoid probate in the future) on their home. Would that disqualify the son from the credit based on the information bellow? The son did not inherite the home as the parents are alive but now that the son is listed on the title--does that fall under ownership interest --- see information bellow? Also, up to the time of the purchase, the son was living in the parent's home. Thanks in advance for your thoughts and comments.

Q. Does previously inheriting a home and living in the inherited home automatically disqualify an individual as a first-time homebuyer with respect to a different home that is purchased within the prescribed 2008 and 2009 time frames?

A. Yes, an ownership interest in a prior principal residence would preclude the taxpayer from being considered a first-time homebuyer. As long as the taxpayer owned and used the prior home as his principal residence, then he is not a first-time homebuyer. There is no exception for taxpayers who did not buy their prior residences. (05/06/09)

I edited that just a bit, because I was sure I would not be the only one who wondered about the other two items. Of course, the list I found had the girl friend as number 11 instead of number 1, but was otherwise the same. I also took out the ads between each item. Hope you don't mind.

Thanks.

Thanks -- very good information -- based on the information that you provided I was able to find the Regulation and the paragraph that relates to lawn care. Thanks again.

I was trying to save the information for future reference -- but the web page was promoting the sale of the book so it did not let me print the information or save the regulation. I kept searching and I found the following -- See oddball deduction #9:

Would You Believe ... ?

Over the years your fellow taxpayers have beaten IRS in court on payments for many crazy things that most of us wouldn't even dream of claiming. Kiplinger.com has uncovered what they think are the weirdest deductions allowed, ranging from pet food for wild cats to paying your live-in girlfriend.

Click through our gallery to see 11 outrageous things ordinary people were able to deduct.

First Up: Oddball Deduction No. 1

A Girlfriend

The owner of several rental properties hired his live-in girl friend to manage them. Her duties included finding furniture, overseeing repairs and running his home. The Tax Court let him deduct $2,500 of the $9,000 her paid her. The disallowed portion was for non-deductible personal services.

Next: Oddball Deduction No. 2

Pet Food

A couple who owned a junkyard were allowed to write off the cost of cat food they set out to attract wild cats. The feral felines did more than just eat. They also took care of snakes and rats on the property, making the place safer for customers. When the case reached the Tax Court, IRS lawyers conceded that the cost was deductible.

Next: Oddball Deduction No. 3

Moving the Family Pet

If you are changing jobs and meet a couple of tests, you can deduct your moving expenses -- including the cost of moving your dog, cat or other pet from your old residence to your new home. Your pet -- be it a Pekingese or a python -- is treated the same as your other personal effects.

Next: Oddball Deduction No. 4

A Trip to Bermuda

This island is more than just a scenic place to visit. It's a great place to schedule a tax write-off because business conventions held in Bermuda are deductible without having to show that there was a special reason for the meeting to be held there. Other countries in the Caribbean region qualify, too, including Barbados, Costa Rica, Jamaica, Saint Lucia and others. Meetings held in Canada, Mexico and all U.S. possessions also receive this favorable tax treatment. Attend a convention in Paris or Rome or Beijing, though, and there's no deduction unless you can show it made as much sense to travel abroad as to head to Pittsburgh.

Next: Oddball Deduction No. 5

Body Oil

A pro bodybuilder used body oil to make his muscles glisten in the lights during his competitions. The Tax Court ruled that he could deduct the cost of the oil as a business expense. Lest it be seen as a softie, though, the court nixed deductions for buffalo meat and special vitamin supplements to enhance strength and muscle development.

Next: Oddball Deduction No. 6

A Private Airplane

Rather than drive five to seven hours to check on their rental condo or be tied to the only daily commercial flight available, a couple bought their own plane. The Tax Court allowed them to deduct their condo-related trips on the aircraft, including the cost of fuel and depreciation for the portion of time used for business-related purposes, even though these costs increased their overall rental loss.

Next: Oddball Deduction No. 7

Babysitting Fees

Fees paid to a sitter to enable a mother to get out of the house and do volunteer work for a charity are deductible as charitable contributions even though the money didn't go directly to the charity, according to the Tax Court. The court expressly rejected a contrary IRS revenue ruling.

Next: Oddball Deduction No. 8

Breast Augmentation

In an effort to get more tips, a stripper with the stage name "Chesty Love" decided to get breast implants to make her a size 56-FF. A female Tax Court judge allowed Chesty to write off the cost of her operation, equating her new, um, assets to a stage prop. Alas, the operation proved to be a problem for Chesty. She later tripped and ruptured one of her implants.

Next: Oddball Deduction No. 9

Landscaping

A sole proprietor who regularly met clients in an office in his home can deduct part of the costs of landscaping the property. The deductible portion is based on the percentage of the home that is used for business, according to the Tax Court. The Court also allowed a deduction for part of the costs of lawn care and driveway repairs.

Next: Oddball Deduction No. 10

Free beer.

In a novel promotion, a gas station owner gave his customers free beer in lieu of trading stamps. Proving that sometimes beer and gasoline do mix, the Tax Court allowed the write-off as a business expense.

Next: Oddball Deduction No. 11

Swimming pool.

A taxpayer with emphysema put in a pool after his doctor told him to develop an exercise regime. He swam in it twice a day and improved his breathing capacity. Turns out he swam in the pool more than his family did. The Tax Court allowed him to deduct the cost of the pool (to the extent the cost exceeded its added value to the property) as a medical expense because its primary purpose was for medical care. Also, the cost of heating the pool, pool chemicals and a proportionate part of insuring the pool area are treated as medical expenses.

You are basically correct.

Prop. Regs. Sec. 1.280A-2

Galazin v. Commissioner, T.C. Memo 1979-206

Thanks -- very good information -- based on the information that you provided I was able to find the Regulation and the paragraph that relates to lawn care. Thanks again.

I have a taxpayer that is a consultant and his office is in his home. The consulting service is his only source of work and he makes a very good salary. Would I be able to deduct part of the expenses that he pays to his gardner. I seem to remember reading an article several years ago that indicated that gardening services were not allowed as a deduction. I have searched the web and I cannot find the article or any other article that talks about the topic.

Thanks in advance for your help.

I have two returns for two brothers that got rejected. They received a W-2 and 1099 for wages and other income that are the result of a lawsuit against Dollar Tree. The W-2 and 1099 are for Calendar Year 2008 and the taxpayers no longer work for Dollar Tree. Have any of you had this problem before and if so, did you have to file paper returns.

Thanks in advance for your help.

0505 o Employer Identification Number (SEQ 0040) of Form W-2 and/or W-2GU, or Payer Identification

Number (SEQ 0026) of Form W-2G, or Payer Identification Number (SEQ 0050) of Form 1099-R or

Company/Trust Identification Number (SEQ 0120) of Form 2439 was issued in the current

processing year.

I have had 3 clients that have had their refunds delayed by about 2 weeks: One MFJ, no itemizations, no rebate, just a small earned income credit. One single, no deductions, no dependents. One Head of Household with Child and EIC. I have not been able to figure out why this is happening either.

This is the first year that I will be offering bank products. I enrolled with CHASE. What do some of you charge for your fees for preparing the RAL documents. I have no idea what the standard fees would be. Also, for those that may not have a checking account, is it easy to cash the checks with proper identification. I do not think I will be preparing many RALs but want to make the service available for possible new clients.

Thanks in advance for your comments.

Staples is offering quickbooks 2009 free today, Monday December 22nd, only. For details check out http://www.staples.com

taxbilly

Thanks -- I had been using an a fairly old version -- Thanks again.

I renewed to day too. just clicked the email & away she went. didn't even have to sign into the website which was nice.

496!

Renewing was very simple - I renewed a few minutes ago.

Dear Eric,

ONLY now have I learnt/recognized that this site depends upon contributions, just as my favorite *independent and non-commercial* radio-stations do. Just as those stations have, this site has borne me through the past few, horrific months when it seemed naught beyond my own resources could.

I would appreciate your naming an amount above which you would not feel your inestimable and essential services would be slighted -- or a range, allowing for the typical parsimony of sole practitioners. I just haven't a clue what would be a 'fair amount' to contribute in support of your project.

Gratefully yours, TaxCPANY

P.S. I'm posting this here because "[email protected]" rejected my first sending of this message.

I would also be interested to know what a "fair amount" would be as I would like to make a contribution to this great site.

Don't worry Colfax, some of us don't have lives and hang out here year round. And we have extensions etc...and a lot of the really fun returns are extended. Plus we have to come here to find out how Mel's software is coming along!

Not to mention what JB is having for lunch.

Who is this "Mel" that is developing the software? A prior ATX employee????