CA Help on Loan Mod and Cancelled Debt

[Tax Prep by Deb]

Ok this one would be real simple had California conformed to Federal on Cancelled Debt.

Client had a loan modification on a non recourse loan (acquisition debt only) that resulted in 199,400 being cancelled (1099C issued box 5 not checked) with a fair market value of 186,569.  Balance on the loan after the forgiveness is $109,500.  (doesn't look right to me, but these figures are on the 1099C and mortgage statement).

With federal it is all excluded and basis of home reduced.  California doesn't conform and it appears that because they kept the home we have to treat the COD as income unless insolvent.

Is my understanding correct on this?  Any thought would be greatly appreciated. 

[Tax Prep by Deb]

Anybody?

[Lion EA]

Haven't done a CA in a long time, but will bump this up again for you.  (I know we have lots of CA preparers.)

[BulldogTom]

I think you are on the correct track.  I would attack it from the insolvency direction.  There is a reason for the forgiveness.  It is not just from the goodness of the bank shareholders heart that they modified the loan.  Did you check to make sure that the loan balance on the 1099C is not inflated with a bunch of accrued "penalty rate interest"?  Could it be that the loan balance before penalty interest and fees was much smaller?  If they are cancelling the debt, but that debt is inflated by interest, you might have a mortgage interest deduction for a big chunk of that cancelled debt.  Get your clients loan docs and see what the real purchase price of the home was and what the real balance of the loan was.

And of course, do a quick look at the assets of the client and see if you can get it all written off under insolvency, or at least a part of it.

Tom
Newark, CA

 

[Tax Prep by Deb]

Thanks Tom,

I have already done that and the doc's actually appear correct.  In other words they make sense including the FMV of the home at the time of the forgiveness.  I have done the insolvency sheet and it appears we can deduct about 1/2 of the cancelled debt.  Was hoping for more but had a feeling I was seeing it right.  There was talk earlier that maybe perhaps they will vote to change this and retroactively at that, so I'm watching to see if the guys in big chief in Sacramento will do so.  I don't have many of these now, nothing like 4 to 5 years ago, but homes were I'm at are still under water.  Getting better, but still not there.

[BulldogTom]

The market is hot in the Bay Area.  My neighbor (Facebook computer geek) was transferred out of state.  Sold his 1150 square foot 3/2 for 620K.  Sold in a week.  There were people showing up at 8PM to look at the house.

It is crazy here. 

Tom
Newark, CA

[Tax Prep by Deb]

I've heard that.  I'm just over the hill from the bay and home values are recovering and prices are rising.  I suspect that within another year home values will be back where they were before the bust.  Great news for those who bought when prices were at it's lowest.