Margaret CPA in OH Posted February 16, 2013 Report Share Posted February 16, 2013 I have the first and only foreclosure of a client. It was a rental property for 6 years after personal residence. When last tenants moved, he couldn't rent to cover mortgage so let it go to foreclosure. I know several here have done these in the last couple of years so would appreciate help. I have read quite a bit and am fairly sure I understand what should go where but don't readily see how to do it using the disposition tab in fixed assets. The balance of principal outstanding was $209097 and fmv was $161,000. He said he tried to rent on Craigslist for several months but gave up and the date of acquisition is Dec. 18, 2012. He has not received a 1099-C but I think he can claim exclusion on Form 982 as it was rental property. Thanks for any assistance! Quote Link to comment Share on other sites More sharing options...
grandmabee Posted February 17, 2013 Report Share Posted February 17, 2013 Why is he claiming the exclusion on 982? You don't have COD until it written off by lender. So if no 1099-C shouldn't be a 982 but not sure he would qualify for 982 anyway. 1 Quote Link to comment Share on other sites More sharing options...
Lee B Posted February 17, 2013 Report Share Posted February 17, 2013 I had a very similar situation last year and I started out heading in the same direction as you. However since it was a rental it ended up generating a capital loss. Question, is this a straight foreclose? Has the foreclosure finalized and title passed. Sometimes it takes forever for the mortgage co or loan processor to finish the paperwork. You may end up with a 2013 transaction. 1 Quote Link to comment Share on other sites More sharing options...
Margaret CPA in OH Posted February 17, 2013 Author Report Share Posted February 17, 2013 grandmabee, the client is not claiming exclusion. I may be based on things I have read, especially a flow chart that mentions that COD may be excludable under Sec. 108(a)(1)(D) for rental property and to claim it on Form 982 and reduce the basis of the property. As I wrote, however, he has not received a 1099-C. It is recourse, marked on the 1099-A, so it may not have COD. Don't yet know. cbslee, I have requested all the documentation, not just the 1099-A, so will see. I assume, since the 1099-A shows in Box 1, Date of Lender's acquisition or knowledge of abandonment 12-18-12, that it is finalized and title passed but will clarify. I honestly did not expect to have to deal with any of this at all with my client base so was not fully engaged in learning all the ins and outs. This one took me very much by surprise. I will know more, hopefully, with the documents I have yet to receive. I figured it would be a loss but then he would have COD for income but maybe that would be 2013. I just want to be sure to put the right data in the right places the first time. Thanks! Quote Link to comment Share on other sites More sharing options...
joanmcq Posted February 17, 2013 Report Share Posted February 17, 2013 Margaret, just because the foreclosure has occured, doesn't mean the lender has actually cancelled the debt yet, especially since it was recourse. Some lenders have been attempting to collect from debtors, especially if they have other assets. And often it can take months or even years for the lender to write off the debt. Since the foreclosure is late in 2012, you most likely have a split in the two transactions. The 'sale' portion has occured, and is reported on the 4797, and likely he has a loss, depending on his basis. The amount left on the loan is considered the selling price. Dave Fogel has some of the best info on his site regarding COD & foreclosures. Here's a link to one article he wrote, and his main website has a nifty flowchart as well as other articles. http://www.fogelcpa.com/Documents/Fogel-ForeclosureMythsCSEA.pdf Quote Link to comment Share on other sites More sharing options...
Margaret CPA in OH Posted February 17, 2013 Author Report Share Posted February 17, 2013 Thanks, Joan, the link you provided is the one I found earlier from posts last year. I have read over several of the articles and printed the flow chart. My question mostly relates to inputting the figures in the right place to get the right outcome. I suspected there might be a COD later with the check that it was recourse. When I follow the flow chart with the bifurcation between g/l and COD, I get a loss of $22,017. It just seems strange to put the 'selling price' as the fmv into the disposition data field but that's how I also end up with the loss on 4797. I guess I'm just looking for a bit more security that the numbers are going in the right places. This 'seems' right based on the figures that flow and I guess I need to prepare him for the balance of the debt to be demanded. So there may not be any COD. Hope so for his sake! Thanks again! Quote Link to comment Share on other sites More sharing options...
Jack from Ohio Posted February 17, 2013 Report Share Posted February 17, 2013 This was on a rental property. The 1099-A is a sales document. You must treat the property as sold for the amount of the mortgage that was cancelled. You must also recapture depreciation in the normal manner. This may result in a capital gain if the amount cancelled was larger than the value of the property. This happens if the market value has dropped since the purchase and/or there have been cash-out re-fi's in the past. This may also trigger taxable gains as well, depending upon his AGI. No debt forgiveness until a 1099-C is issued. THIS IS NOT A DEBT CANCELLATION. Very often clients that allow rentals to be foreclosed on end up with a taxable gain and owe capital gains on the foreclosure. Quote Link to comment Share on other sites More sharing options...
Margaret CPA in OH Posted February 17, 2013 Author Report Share Posted February 17, 2013 Jack from Ohio, thanks for chiming in. What you write makes more sense to me but doesn't fit with the flow chart by David Fogel. You must know that the 1099-A box 2 says "Balance of principal outstanding" not "amount of mortgage that was cancelled." Is this the same thing? If this is the correct handling then he gets hit with a $26,080 capital gain now and potentially a debt forgiveness later, Fannie Mae depending, of $48.097 as ordinary income? If that happens then he may qualify for the Sec. 108 exclusion? When client told me about this, he said an attorney friend said it wouldn't be taxable. How do I tell him that $26,000 is taxable now even if a COD, should it happen, may not be as it could be excludable? He will be a hurtin' buckaroo, for sure! This seems the kind of thing that drives folks to bankruptcy, eh? Anyway, his situation seems to fit exactly your last observation. I don't think he has the money to pay, though. And his daughter is supposed to start college next fall. Maybe not.... Thanks again! Quote Link to comment Share on other sites More sharing options...
Jack from Ohio Posted February 17, 2013 Report Share Posted February 17, 2013 Jack from Ohio, thanks for chiming in. What you write makes more sense to me but doesn't fit with the flow chart by David Fogel. You must know that the 1099-A box 2 says "Balance of principal outstanding" not "amount of mortgage that was cancelled." Is this the same thing? If this is the correct handling then he gets hit with a $26,080 capital gain now and potentially a debt forgiveness later, Fannie Mae depending, of $48.097 as ordinary income? If that happens then he may qualify for the Sec. 108 exclusion? When client told me about this, he said an attorney friend said it wouldn't be taxable. How do I tell him that $26,000 is taxable now even if a COD, should it happen, may not be as it could be excludable? He will be a hurtin' buckaroo, for sure! This seems the kind of thing that drives folks to bankruptcy, eh? Anyway, his situation seems to fit exactly your last observation. I don't think he has the money to pay, though. And his daughter is supposed to start college next fall. Maybe not.... Thanks again! The 1099-A is sales transaction form. Consider the transaction as him selling the property to the bank for the "Balance of principal outstanding" and it will all fall into place. I will look for the IRS pub with this in it, but I know that what I am saying is correct. I am not familiar with the flow chart you speak of, but if it is about debt cancellation, it does not apply to this situation. When the bank disposes of the property, then there may be debt forgiviness and 1099-C. The debt forgiveness MAY not be taxable, but that is entirely another issue with different rules. The attorney is obviously not up to date on tax law. I will post the IRS pub when I find it. Quote Link to comment Share on other sites More sharing options...
Margaret CPA in OH Posted February 17, 2013 Author Report Share Posted February 17, 2013 Thanks again, Jack from Ohio. I think the pub is 4681. I just want to be sure about terminology before laying the bad news on the client. You make too much sense to be wrong! Here is the link I found from prior year posts here on the subject: http://www.fogelcpa.com/Pages/TaxArticles.aspx The first line is the flowchart to download. Thanks again! Quote Link to comment Share on other sites More sharing options...
joanmcq Posted February 17, 2013 Report Share Posted February 17, 2013 The difference is whether it's recourse or nonrecourse debt. If you use the debt as the selling price, some of the income is going to be counted twice; as COD and as gain. At least that's the way I see it. I'm a bit too tired right now to work out the numbers. Quote Link to comment Share on other sites More sharing options...
BulldogTom Posted February 17, 2013 Report Share Posted February 17, 2013 Margaret, Go to page 4-32 in your Express Answers guide. It lays it out pretty well. 1. Is it a recourse or a non-recouse loan? If it is non-recourse, when they took the property, they took all they could get, so the total amount of the loan is considered the sales price (even if that is more than the FMV of the property). If it is recourse the sales price is usually the FMV of the property. 2. There is a worksheet at the top of page 4-33 that will help you with all of this. 3. There is no COD income until there is cancelled debt. 4. There is a sale of property that needs to be recorded on this tax return. The gain or loss will come through the schedule E because it was a rental property. ATX handles all the forms properly (or it did in past years) if you will just make the disposition in fixed asset tab. 5. Don't freak out at the result. They should have asked you about it before they did it if they wanted to know the consequences. The result is what it is and it ain't your fault. Tom Hollister, CA 1 Quote Link to comment Share on other sites More sharing options...
joanmcq Posted February 17, 2013 Report Share Posted February 17, 2013 Correction; gain or loss is on 4797. 1 Quote Link to comment Share on other sites More sharing options...
Margaret CPA in OH Posted February 18, 2013 Author Report Share Posted February 18, 2013 Buuldog Tom, thanks for the direct line to Express Answers. I haven't really used it before, preferring QF, but this time it is perfect! Thanks to all for the help. I hope not to see another one of these but feel much better about how to handle the data if not the client! Quote Link to comment Share on other sites More sharing options...
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