1099-C & Main Home Exclusion

[tkamba]

I had a client call today and state that the rule had changed from 12 month to 1 month residency to qualify for the Main Home Exclusion. Of course I tell him this sounds too good to be true.

He has a 3 flat that he purchased 8 yrs ago for $360,000. He never refinanced but because of no payments, interest and RE Taxes for the last couple of years, the current balance is about $420,000. He is trying to short sale it for $270,000.

He just recently moved into this property, March 2013, after a short sale of another rental property that he wants to claim this same Main Home Exclusion because he moved in for a short time before the sale. I do not have the info for that sale.

I research on IRS website, per Form 982 instructions and Publication 4681, they describe Main Home as follows:

　

"Main home. Your main home is the one in which you live most of the time. You can have only one main home at any one time."

Nothing about length of time it needs to be your main home? I would find this too good to be true but I seem to be wrong. I told him to be safe, he may want to just claim insolvency but REALLY? You do not have to live in the home for any length of time to get the exemption?

[jasdlm]

Are you talking about the Mortgage Relief Debt Forgiveness Act? If so, I believe it uses the Section 121 definition of Principal Residence, which would be 2 out of the last 5 years. Instructions for form 982 say Principal Residence Indebtedness.

Maybe I'm not following what you're asking, because I'm not sure what the 12 months (as opposed to 1 month) would refer to.

[tkamba]

That was my feeling, that Section 121 Principal Residence, time frames would apply but he insists that 12 months residency is required under Mortgage Relief Debt Forgiveness and that there has been an amendment that changed the homestead residency requirement from 12 consecutive months to 1 month.

He went to some Real Estate Seminar and you know they know everything.

[Pacun]

"Main home exclusion" has nothing to do when you sell at a loss. Which one is it?

Also, if he is insolvent, you can file form 982 for rental. How do you know he will get 1099-C this year?

[Lee B]

According to Pub 4681, the indebtedness must be qualified principal residence indebtedness

which is any mortgage you took out to buy, build of substantially improve your main home.

This is qualified real property business indebtedness, which has in own exclusion rules. (See page 7 Pub 4681)

[tkamba]

He has a contract for short sale set up but has been putting it off trying to figure out what to do, especially if he owes tax on the write off.

He is not an existing client, he was recommended to call me by another client, so I do not know how much of his original purchase is left after depreciation. It is on his taxes as a 3 Flat rental property for 8 years per the taxpayer. He just moved in to the building in March 2013 and is claiming the other 2 apartments are vacant or maybe family lives there (per our conversation, which ever will work). That is why he is suggesting getting out of the write off using the main home exemption on Form 982.

But sounds like the Qualified Real Property Business Indebtedness may apply if he is not insolvent or at a loss. I will have to look at those requirements. Thank you!

[Jack from Ohio]

The forgiveness of the debt will probably cause him a large capital gain. This has nothing to do with the 1099C.

You need to sharpen up on the differences. The debt forgiveness is treated a sale for the amount of the forgiven debt. Depreciation recapture must also be calculated. This amount is NOT reduced.

If he receives a 1099C, there are exclusion rules for the amount of debt not being taxed as income. This is a totally separate calculation and does not reduce the amount of gain on the sale.

[kcjenkins]

I agree with Jack, he's going to owe on the forgiveness. And frankly, he sounds like a client that, if you do take him on, you'll regret it. That "(per our conversation, which ever will work)" is a dead givaway that he's going to tell you whatever he thinks will get him a return with less owing, no matter how far from the truth it is. And your name will be on it. Are you sure you want that?

[Jack from Ohio]

I have had to educate several clients on the fact that the repossession of a business property is treated like a sale. The gain cannot be avoided. Sometimes the lending institution will issue a 1099A showing the fulfillment of the note due to repossession. The 1099A is not forgiveness of the debt.

After the bank sells the property, the taxpayer may still be liable amount that the bank writes off. The 1099C shows debt forgiveness and there are possible exclusion rules that may prevent him from claiming it as income.

Most have refinanced a few times and taken out a bunch of cash. Property ends up selling for far less than the mortgage. I get the question: "How am I supposed to pay that?" I have a reply: "What did you do with the cash you took out when you refinanced?"

[jainen]

>>because of no payments, interest and RE taxes<<

Unfortunately I don't have access to my regular computer, so I can only suggest what to look for in your own research. There is some example or other clarification in the regs or a pub, explaining that interest and taxes accrued later are not eligible for the debt exclusion because they are not part of the original acquisition debt.

Section 121 plainly says one must use the house as a principal residence for 2 out of 5 years. That is NOT saying the 2 years defines principal residence, which only means where one spends the most time during any tax year (generally, at least six months).

The one month thing sounds to me like a deliberate, self-serving misunderstanding. I would guess it's loosely based on a minor point of a specific court decision or Private Letter Ruling, with little or no relevance to your client's facts. Ask for a citation.