Timeshare & COD

[Max W]

Client had a timeshare that was foreclosed. The debt was $45K and the FMV was $50K.

The COD does not fall under any of the categories for discharge of debt, form 982.

Since the debt is less than the FMV, is there any way to offset the COD?  

I've thought of Line 35 as an adjustment of income, but do not know if that is acceptable.

Any thoughts?

TIA

[Catherine]

You need to get the 1099-A and the 1099-C before you can start.  

The bank acquired the timeshare for $45K.  With a FMV of $50K they don't have a loss assuming they sell for FMV.  Cancellation of the debt can lag, sometimes for years.  Much better for the client if both are in the same year but you can't rush the bank.

I have a worksheet somewhere and will dredge it up for you -- but you will need the A and the C both at some point.

[Max W]

the numbers came from a 1099-C. I doubt that an A will be issued, especially coming from a time share.

Most of the large mortgage lenders seem to handle 1099's appropriately.

Usually, the A comes first and then a year or more later, as you say, the C is issued.

 

               

[Jack from Ohio]

TimeShare is personal.  Unless the taxpayer can prove insolvency (there is a worksheet) on the day before the debt was cancelled, the entire amount is taxable.

FMV is not relevant.  The 1099-C shows the amount the bank wrote off.

[Max W]

Jack. FMV has everything to do with it.

http://www.irs.gov/publications/p4681/ch01.html#en_US_2014_publink1000192656

See paragraph "Sales or Other Dispositions (Such as Foreclosures and Repossessions)"

The FMV stands in lieu of a sale price and since the FMV was Greater than the debt cancelled, there is no tax liability.

Since it is personal property, and not a primary residence, the question is how to report it.

I am leaning to offsetting the COD reported on Line 21, with an entry on Line 35.

[Jack from Ohio]

Jack. FMV has everything to do with it.

http://www.irs.gov/publications/p4681/ch01.html#en_US_2014_publink1000192656

See paragraph "Sales or Other Dispositions (Such as Foreclosures and Repossessions)"

The FMV stands in lieu of a sale price and since the FMV was Greater than the debt cancelled, there is no tax liability.

Since it is personal property, and not a primary residence, the question is how to report it.

I am leaning to offsetting the COD reported on Line 21, with an entry on Line 35.

Disagree.  The sale price is the amount of indebtedness that was owed when the bank took possession.  FMV has NO RELEVANCE.  The amount of debt cancelled is the difference between the amount owed when possession was taken and what was received when sold.  This amount is taxable unless the insolvency rule applies.  FMV is irrelevant.

 

The really sad thing is that the IRS will never check on this if it is all written off on Form 982.

Edited September 28, 2015 by Jack from Ohio

[Max W]

There is no bank involved. The time share company is the lender and takes back title on foreclosure.

They lose nothing, they just resell the time share to someone else. 

With banks it is a different story, unless they take and sell the property

There is no mechanism on Form 982 to write this off. Time shares do not fit any of the categories of assets, so it can't be written off there.

It is not rental or business property and it is not the primary residence where the COD can be used to reduce basis. 

[Jack from Ohio]

There is no bank involved. The time share company is the lender and takes back title on foreclosure.

They lose nothing, they just resell the time share to someone else. 

With banks it is a different story, unless they take and sell the property

There is no mechanism on Form 982 to write this off. Time shares do not fit any of the categories of assets, so it can't be written off there.

It is not rental or business property and it is not the primary residence where the COD can be used to reduce basis. 

All taxable.  For the very reasons you state.  It does not have to be a bank.  Substitute the word "lender" and it all has the same meaning. 

Whether the timeshare company loses or gains money is irrelevant.  The same rules apply.  The IRS will receive the 1099-C and expect it to be shown on a tax return.  If none of the exceptions on Form 982 apply, then it is all taxable.  It is treated as a second home.

 

From the link you provided:

The entire amount of the nonrecourse debt is treated as an amount realized on the disposition of the property. The gain or loss on the disposition of the property is measured by the difference between the total amount realized (the entire amount of the nonrecourse debt plus the amount of cash and the FMV of any property received) and your adjusted basis in the property. The character of the gain or loss is determined by the character of the property.

Edited September 28, 2015 by Jack from Ohio

[SaraEA]

The first thing to determine, which the OP did not mention, is whether the debt was recourse or nonrecourse.  If nonrecourse, there is no cancellation of debt income (CODI) but there is still a sale of the property.  " For nonrecourse debt, the amount realized is the greater of the outstanding debt of all loans immediately before the foreclosure or fair market value of the property plus the proceeds received from the foreclosure (e.g., relocation payment from the lender). The adjusted basis immediately before the foreclosure is subtracted from the amount realized to determine the gain or loss." "IRC §7701(g) states that the sales price is the greater of the FMV or the outstanding loan balance for nonrecourse loans to determine the gain or loss."  In your case, $50k - adjusted basis = gain on sale.  The gain cannot be excluded on Form 982, which applies only to CODI.

If recourse, then you have both CODI and the sale.  In this case, "Cancellation of debt income is determined by the outstanding debt balance immediately before the foreclosure (minus debt liable after the foreclosure) minus the fair market value of the property equals the cancellation of debt income."  In your case, this is zero because FMV was greater than the debt.  For the sale, "The amount realized is the lesser of the fair market value of the property or outstanding debt balance."  Thus, $45k - adjusted basis = gain on sale.

All these quotes are from the Audit Techniques Guide http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Foreclosure-ATG-Chapter-2-Type-of-Debt

The IRS has numerous pubs covering foreclosures and cancellation of debt.  I'm giving you the distilled version.

You might want to verity the FMV reported by the lender.  If the lender sold the property shortly after foreclosing on it, you can certainly use the sales price as the FMV and attach a note to the return.  (Only if it's in your client's favor, of course )

If a lender forecloses and cancels debt in the same year, they will usually only issue a 1099C.  I have rarely seen both a 1099A and 1099C for the same property.

[Abby Normal]

Some additional logs on the fire:

http://www.nolo.com/legal-encyclopedia/consequences-timeshare-foreclosure.html

http://www.nolo.com/legal-encyclopedia/how-deduct-loss-on-timeshare-sale.html