Rental Reposession and (I think) Incorrect 1099-C

[RitaB]

Debt on rental is 200K, FMV is 200K, 1099-C says cancelled debt is 200K. Wait, what?

If the FMV of the relinquished rental is the same as the debt, the lender did not lose anything, the borrower did not gain anything.

I know to figure the gain or loss on the 4797. Got it.

But the 1099-C? If you skip out on credit card debt, you get a 1099-C because you got the keep the $15,000 in shoes, but the credit card company paid for them. You realized a gain of $15,000. The credit card company is out $15,000. This is not that situation at all. The lender got a house worth the amount owed to them on it. The lender got the shoes, in essence.

So, would you on Form 1040, line 21, enter the 200K as COD then subtract it with a statement "FMV of property acquired by 1099-C issuer is -200K"? I'm afraid to ignore it. And it does not go on 982. Form 982 is used to exclude gain from COD INCOME. There's no income here.

[Margaret CPA in OH]

I am interested in this, too, although the situation I had was different in several ways. The property actually sold, part of the mortgage was paid, the rest 'forgiven' and there was no FMV of the property in Box 7 because the mortgage lender didn't take it back.

I have pored over this stuff and still am shaky but think you may be on the right track. I ended up reducing the basis of the property.

[RitaB]

My best off the cuff answer on yours Margaret is that the taxpayer has income in the amount of the debt forgiven.

Obviously, if a rental, you got depreciation to deal with, but if you reduced basis by the amount of debt the taxpayer didn't pay, you covered the gain on the disposal. I think. We really should make more money.

[Margaret CPA in OH]

Rita, that is exactly what happened and what I did. When I reduced the basis, he had a significant gain but at cg rates. This was a better outcome than the full amount at ordinary rates. Still, he's in shock at the tax due. He isn't insolvent but has to draw out retirement money and, at 64, hasn't a lot of time left to regenerate. Like me, he will be working past 'normal' retirement age.

I definitely should be making more money but am sometimes a softy on folks like this. It's hard to kick him when he's down. I did have to put in lots of extra effort even outside the learning curve. He has MN and NC state returns, too, plus OIH for 6 months before he quit that job plus temporary expenses while training. Whew! I want him to just settle down for a while.

[RitaB]

There sure are a lot of cricket sounds today.

[Jack from Ohio]

The 1099C indicates the amount of the debt forgiven. FMV is not a factor. Form 982. Fill in the amount of debt forgiven on line 2, check yes on line 3 and put the amount of debt forgiven on live 4 as well. This will take care of the 1099C. However, the property must still be considered sold for the amount of the debt forgiveness. This is a separate item. This must be done even if Form 1099A is not received.

Form 1099A is the form where the FMV comes into play. 1099A is the sales document that must be used to calculate gain or loss on the repossession. The property must be sold for the amount of the debt forgiveness. Basis and recapture of depreciation as normal. Many times there is a taxable gain on the repossession.

[RitaB]

The 1099C indicates the amount of the debt forgiven. FMV is not a factor. Form 982. Fill in the amount of debt forgiven on line 2, check yes on line 3 and put the amount of debt forgiven on live 4 as well. This will take care of the 1099C. However, the property must still be considered sold for the amount of the debt forgiveness. This is a separate item. This must be done even if Form 1099A is not received.

Form 1099A is the form where the FMV comes into play. 1099A is the sales document that must be used to calculate gain or loss on the repossession. The property must be sold for the amount of the debt forgiveness. Basis and recapture of depreciation as normal. Many times there is a taxable gain on the repossession.

Yes, she got a 1099-A, and both figures on that were $200K. FMV is used for Form 4797, which I have done, and don't have a question on that.

The lender got the house, worth $200K, and the debt owed was $200K, there is no income from debt cancellation. Form 982 is used to exclude income. There is no gain here.

See page 2 under "Purpose of the Form":

http://www.irs.gov/pub/irs-pdf/f982.pdf

[Jack from Ohio]

Yes, she got a 1099-A, and both figures on that were $200K. FMV is used for Form 4797, which I have done, and don't have a question on that.

The lender got the house, worth $200K, and the debt owed was $200K, there is no income from debt cancellation. Form 982 is used to exclude income. There is no gain here.

See page 2 under "Purpose of the Form":

http://www.irs.gov/pub/irs-pdf/f982.pdf

Fair market value is NOT the basis for the sale. Use normal basis and recapture of Depreciation. FMV has no place in the calculations.

[RitaB]

Fair market value is NOT the basis for the sale. Use normal basis and recapture of Depreciation. FMV has no place in the calculations.

Yes, yes, I'm sorry, the outstanding principal was the selling price, which just happened to also be the FMV, AND the amount on 1099-C. I honestly am not asking for help on the 4797. And you know ATX calculates the depreciation for me. I got that part. Don't wanna discuss the 4797.

My problem is that I think there is zero debt forgiven because the FMV and the outstanding debt are the same. The lender got a house worth the outstanding debt. Is that not the same as getting the money? How is there income from debt cancellation? If the FMV were $190K and the outstanding principal were $200K, the cancelled debt would be $10K, right? Well, the value of the house and the debt owed are BOTH $200K. The taxpayer did not realize income. The lender did not lose $200K, or anything, why would the taxpayer report income on line 21? I don't see how you can say use $200K as the selling price on the disposition on Form 4797 and then use $200K AGAIN on line 21.

Give me a little credit, this is not as obvious as you think:

http://forum.thetaxbook.com/showthread.php?23438-1099a-amp-1099c

[Jack from Ohio]

If the 1099-C shows $200K forgiven, that is the amount that was forgiven. A completely separate function than the 1099A selling transaction. FMV has no effect on what the lender reports as debt forgiven. This is a function of the lender's bookkeeping.

The only way there would be no debt forgiven is if the lender sold the property for the exact amount of the loan. Not likely to happen.

[joanmcq]

Are you sure the mortgage wasn't for more than the FMV of the house? Did he refi and pull out cash?

[RitaB]

Are you sure the mortgage wasn't for more than the FMV of the house? Did he refi and pull out cash?

Yes. No.

[RitaB]

1099-A Box 2 = 200K, Box 4 = 200K

1099-C Box 1 = 200K

Yes, the debt is 100% acquisition of the house. Yes, the house is worth $200K. Yes, the debt was $200K. Yes, the lender has the house. No, the taxpayer does not have the house.

The sales price of the house on Form 4797 = $200K.

If you also enter $200K on Line 21, cause the lender is apparently writing off $200K at the same time they took back a house worth $200K to satisfy a debt of $200K, your soon to be ex client has no rental house and a $70K tax bill.

You have entered $400K income for a $200K house. $200K on Line 21, and $200K on the 4797. This is not the best accounting work you have ever done.

Yes, I can use Form 982 incorrectly, as it is supposed to be used to exclude gain and there is no gain on this deal, no matter what the 1099-C says, but I hate half-assing things. I would prefer to subtract the $200K off Line 21 with a statement saying, in essence, "The 1099-C is wrong."

[Jack from Ohio]

How much did the lender write off? That is the amount to use for sale amount on 4797 and the amount on 982. Period.

Basis for the sale would be exactly the same as if he sold it to someone else. FMV has no bearing on either calculation.

[RitaB]

How much did the lender write off? That is the amount to use for sale amount on 4797 and the amount on 982. Period.

Basis for the sale would be exactly the same as if he sold it to someone else. FMV has no bearing on either calculation.

Were you the Energizer Bunny in a previous life?

[David1980]

The 1099C indicates the amount of the debt forgiven. FMV is not a factor.

The 1099-C instructions disagree with that.

Box 2. Amount of Debt Discharged

Enter the amount of the canceled debt. See Debt Defined and Exceptions, earlier. The amount of the canceled debt cannot be greater than the total debt less any amount the lender receives in satisfaction of the debt by means of a settlement agreement, foreclosure sale, a short sale that partially satisfied the debt, etc.

If I owe the bank $500k and they foreclose on $200k property they should be issuing a 1099-C for $300k. Total debt less any amount the lender receives (the FMV of the home) through foreclosure. Table 1-1 in Publication 4681 does the calculation in how much is ordinary income and how much is COD income. FMV of property can affect both of those calculations.

[RitaB]

Where have you been all my life, David 1980? Yes, FMV has EVERYTHING to do with how much debt is "forgiven". In this case, they didn't "forgive" anything. The lender got a house worth $200K that exactly covers a $200K debt.

[Jack from Ohio]

The 1099-C instructions disagree with that.

Box 2. Amount of Debt Discharged

Enter the amount of the canceled debt. See Debt Defined and Exceptions, earlier. The amount of the canceled debt cannot be greater than the total debt less any amount the lender receives in satisfaction of the debt by means of a settlement agreement, foreclosure sale, a short sale that partially satisfied the debt, etc.

If I owe the bank $500k and they foreclose on $200k property they should be issuing a 1099-C for $300k. Total debt less any amount the lender receives (the FMV of the home) through foreclosure. Table 1-1 in Publication 4681 does the calculation in how much is ordinary income and how much is COD income. FMV of property can affect both of those calculations.

I disagree, but I seem to be outvoted. The amount the bank WRITES OFF THEIR BOOKS is the amount on 1099C.

If I owe the bank $200,000 on a rental property. The bank repossesses it. The bank sells it for $1,000, the 1099C will show $199,000 DESPITE the FMV. Show me any rules to dispute my position.

[RitaB]

The amount the bank WRITES OFF THEIR BOOKS is the amount on 1099C.

Well, just because Fred Lender writes it off, don't make it right. Jack.

I got hairdressers whose previous preparers wrote off their do-overs and gift certificates they issued, too.

[RitaB]

If I owe the bank $200,000 on a rental property. The bank repossesses it. The bank sells it for $1,000, the 1099C will show $199,000 DESPITE the FMV. Show me any rules to dispute my position.

So, you think this lender sold this house for zero? The borrower owed $200K, so if the bank issued the 1099-C for $200K, they musta sold the house for zero is what you just said.

[Pacun]

Your client should call the bank and find out what happened, who knows, maybe he had two loans or a line of credit. In any event, either the client will admit to the debt forgiven or the bank should issue him a new, correct 1099-C with the correct amount which seems to be 0.

I would not prepare any form 1040 or 4797 until I know the documents on my desk are correct. In this case, there seems to be an issue with the 1099-C.

You have not mentioned if your client is insolvent, so before bringing up form 982, we need to know that.

[Jack from Ohio]

Well, just because Fred Lender writes it off, don't make it right. Jack.

I got hairdressers whose previous preparers wrote off their do-overs and gift certificates they issued, too.

Hairdressers are not banks.

So, you think this lender sold this house for zero? The borrower owed $200K, so if the bank issued the 1099-C for $200K, they musta sold the house for zero is what you just said.

Show me any rules to dispute my position.

[RitaB]

Your client should call the bank and find out what happened, who knows, maybe he had two loans or a line of credit. In any event, either the client will admit to the debt forgiven or the bank should issue him a new, correct 1099-C with the correct amount which seems to be 0.

I would not prepare any form 1040 or 4797 until I know the documents on my desk are correct. In this case, there seems to be an issue with the 1099-C.

You have not mentioned if your client is insolvent, so before bringing up form 982, we need to know that.

This was the only loan. And, you are exactly right, I never said if the client was or was not insolvent, so nobody should be talking about the 982.

I respect your opinion about getting a corrected 1099-C. Thank you.

[David1980]

I disagree, but I seem to be outvoted. The amount the bank WRITES OFF THEIR BOOKS is the amount on 1099C.

If I owe the bank $200,000 on a rental property. The bank repossesses it. The bank sells it for $1,000, the 1099C will show $199,000 DESPITE the FMV. Show me any rules to dispute my position.

I think we agree on the $199,000 depending on why the bank sold it for $1,000.

Usually what happens is the bank forecloses and auctions off the home and takes the best offer they get. In which case the sale price and FMV are probably close enough to call the same. They're not going to get the Zillow estimate price in a foreclosure auction but the house probably isn't fixed up nicely like it would be in a regular sale. So that sale price is probably a good number to rely upon for FMV. And there certainly could be situations in which a $200k house now has a FMV of $1,000. If the prior owners used it as an unofficial hazardous waste dumping site that someone will have to pay significant money to clean up for example. So if $1,000 is the best they could sell it for, sure that could be FMV and $199k of cancellation of debt makes sense.

If on the other hand someone at the bank liked the house and thought it would make a nice gift for their nephew and convinces someone at the bank to sell it for $1,000 instead of going through a public auction that $1,000 sale price is meaningless. I still believe the 1099-C should show the write off amount for the bank, but I don't believe the write off amount for the bank should be $199k. If that house was worth say $150k the fact they sold it for $1k doesn't give them a $199k write-off. The write off would be the difference between what was owed and what they could have sold the home. The $149k is probably compensation to someone if they sold it to an employee for $1k.

I think the situation you're getting at is where I have a house worth $250k and get a 1099C for $350k. Can I subtract $250k from the $350k because $250k is the FMV? NOT ENOUGH INFORMATION! If the 1099-C is correct, the answer is NO! Based on the value of the home and the 1099C my total debt was probably $600k, as the issuer of the 1099-C is required to reduce debt by amounts received (the house) in determining the cancellation of debt amount. Which would also be write-off amount for the bank as you point out - they sell the house for $250k they write off $350k. This seems to be a common mistake made by taxpayers - they assume the 1099C is showing the total debt rather than the cancelled amount (or write off amount).

The problem is, what if the 1099C is not correct? What if total debt owed to the bank was $350k, the bank sells the house for $250k, and they then issue a 1099-C for $350k? That 1099-C is wrong, flat out. I would no more report $350k of COD income on the tax return than I would include all the income from a W-2 that had an extra 0 on the end in error. If the form is wrong the form is wrong. What actually happened is what is what matters.

Table 1-1 in IRS Publication 4681 is very good for calculating the COD and gain/loss amounts for a foreclosure. I've never run into a situation in which it didn't work. I've seen it used incorrectly, sure. For example with 1099-C where the prior preparer assumed the debt cancelled was the total debt owed and in fact the 1099-C was correct on that one, so they significantly underreported income. If you know the correct total debt and the FMV the table works though.

[Jack from Ohio]

I think we agree on the $199,000 depending on why the bank sold it for $1,000.

Usually what happens is the bank forecloses and auctions off the home and takes the best offer they get. In which case the sale price and FMV are probably close enough to call the same. They're not going to get the Zillow estimate price in a foreclosure auction but the house probably isn't fixed up nicely like it would be in a regular sale. So that sale price is probably a good number to rely upon for FMV. And there certainly could be situations in which a $200k house now has a FMV of $1,000. If the prior owners used it as an unofficial hazardous waste dumping site that someone will have to pay significant money to clean up for example. So if $1,000 is the best they could sell it for, sure that could be FMV and $199k of cancellation of debt makes sense.

If on the other hand someone at the bank liked the house and thought it would make a nice gift for their nephew and convinces someone at the bank to sell it for $1,000 instead of going through a public auction that $1,000 sale price is meaningless. I still believe the 1099-C should show the write off amount for the bank, but I don't believe the write off amount for the bank should be $199k. If that house was worth say $150k the fact they sold it for $1k doesn't give them a $199k write-off. The write off would be the difference between what was owed and what they could have sold the home. The $149k is probably compensation to someone if they sold it to an employee for $1k.

I think the situation you're getting at is where I have a house worth $250k and get a 1099C for $350k. Can I subtract $250k from the $350k because $250k is the FMV? NOT ENOUGH INFORMATION! If the 1099-C is correct, the answer is NO! Based on the value of the home and the 1099C my total debt was probably $600k, as the issuer of the 1099-C is required to reduce debt by amounts received (the house) in determining the cancellation of debt amount. Which would also be write-off amount for the bank as you point out - they sell the house for $250k they write off $350k. This seems to be a common mistake made by taxpayers - they assume the 1099C is showing the total debt rather than the cancelled amount (or write off amount).

The problem is, what if the 1099C is not correct? What if total debt owed to the bank was $350k, the bank sells the house for $250k, and they then issue a 1099-C for $350k? That 1099-C is wrong, flat out. I would no more report $350k of COD income on the tax return than I would include all the income from a W-2 that had an extra 0 on the end in error. If the form is wrong the form is wrong. What actually happened is what is what matters.

Table 1-1 in IRS Publication 4681 is very good for calculating the COD and gain/loss amounts for a foreclosure. I've never run into a situation in which it didn't work. I've seen it used incorrectly, sure. For example with 1099-C where the prior preparer assumed the debt cancelled was the total debt owed and in fact the 1099-C was correct on that one, so they significantly underreported income. If you know the correct total debt and the FMV the table works though.

We cannot dispute, appeal or control the process the banks or lending institutions use to determine the amount of write off. That is all internal policy within each institution.