Hahn1040 Posted October 16, 2016 Report Share Posted October 16, 2016 I have spent several hours reading various threads about COD but none that address EIC. here is my client: She got the house in the divorce. Lived in it for a couple of years with the son. In 2012, she decided she needed to find herself and gave the son to his dad and rented out the house and she went to try out city life and moved to DC She spent most of 2014 in Southeast Asia at a Yoga place. ... at first she used the rent to pay the mortgage, but midway through 2014 she stopped making the mortgage payment. when the tenants moved out in April 2015 she let the bank take the house. COD is $38,000 she had rid herself of her worldly possessions so her assets were about $1,500 and credit card debt about $18,000... and the mortgage was $38,000 more than the FMV of the house. so she was definitely insolvent. In 2015, she had moved to Charleston,SC and did a couple of odd jobs ($11,000 wages) before going to another Yoga retreat place in December. the net on the rental is positive (because she did not make any mortgage payments) but less than the $3,400 EIC limit for investment income. AGI $13,000. SO she qualifies for EIC!!! I can't find anything that disqualifies her. But it seems to me that having $38,000 income excluded would disqualify her from EIC. ....perhaps I am being uncharitable.... have any of you come across this before? thanks for any thoughts! Quote Link to comment Share on other sites More sharing options...
jklcpa Posted October 16, 2016 Report Share Posted October 16, 2016 I'll start by saying that I could be totally wrong here, but something sticks in the back of my mind about this COD income related to a rental and I couldn't find specifically what I was looking for. I did find the the article I've linked to below though. There are differences in handling depending on whether the debt is recourse or nonrecourse, so you should consider that. If you look at the section "Foreclosures Involving Recourse Debt" it talks about inclusion of the deemed gain and also the application of Rev Ruling 92-92 that would classify it as being attributable to the passive activity. In that instance, it might be that this income would be considered investment income because it is tied to the rental. Sorry, I don't know for sure if this is helpful or muddies the waters more, just putting it out here for your consideration. It's a CPA's blog post, but it does give references to the code and rev ruling in it that may be helpful: http://www.wipfli.com/BlogPost_Tax_prop_foreclosures_consequences_031511.aspx *IF* the above is true and must be included, I think the taxpayer would be knocked out of the EIC by the investment income under IRC 32(i) subitems (C)(D) & (E) https://www.law.cornell.edu/uscode/text/26/32 1 Quote Link to comment Share on other sites More sharing options...
jklcpa Posted October 16, 2016 Report Share Posted October 16, 2016 I also found the article below that may be helpful, written by an EA/CPA, also has direct references to the code. Your client can't use the exclusion under personal residence since the property was a rental at the time of foreclosure. I also believe that based on the facts and circumstances you described, that this rental would not be a trade or business, so I don't think that exclusion would apply either. What you might get from this though is the proper handling of the foreclosure as it relates to a rental property. Does your client have a gain? The deemed proceeds would be the FMV since you said that the FMV was less than the mortgage balance at the time of foreclosure. What was this taxpayer's adjusted basis in the property?http://www.fogelcpa.com/Documents/FogelRentalForeclCSEA.pdf Quote Link to comment Share on other sites More sharing options...
Hahn1040 Posted October 16, 2016 Author Report Share Posted October 16, 2016 thank you so much! I appreciate your input! I agree it is definitely not personal residence. she had not lived in it since 2011. (above I had put 2012 in error) the tenants moved out at the end of march. T/P did not move back in and made no attempt to rent it again. By then she was almost a year behind on the mortgage payments, so the bank started to foreclose. the 1099-C shows it is recourse. However, I am wondering if that is accurate. It was a VA loan. Seems like that would be non-recourse? Isn't that the whole point of the VA loan is that the VA comes in and takes it off the lenders hands? there is actually a $9,000 loss. My understanding is that the loss is used to reduce tax attributes and is thus zeroed out for the return. Then again, the more I read the more confused I get about it all. In ATX how do I "reduce the capital loss"? perhaps a separate entry on the 4797 showing an offset? Again thanks! Quote Link to comment Share on other sites More sharing options...
jklcpa Posted October 16, 2016 Report Share Posted October 16, 2016 I am not sure of their exact classification, but the VA acts as the guarantor backing the loan, and state law governs whether or not a deficiency judgment can be obtained. I have heard that CA, a nonrecourse state, DID go after some with deficiency judgments. If this is Virginia, it is a state that allows for deficiency judgments and perhaps that is why the 1099C shows it as recourse, but I am just guessing at that. It might be that the bank evaluated the client's available assets and decided to not file for the deficiency judgment based on the relatively small amount of debt being discharged since the client's next move could have been to file for bankruptcy, and that is why she received the 1099-C. The COD income on a VA loan ordinarily would have been nontaxable under the Mortgage Foregiveness Debt Relief Act of 2007 if it had been on the personal residence, but that option was lost once the home was converted to rental though. Pub 908 has good information on how to handle the adjustment for the tax attributes starting on about page 27. https://www.irs.gov/pub/irs-pdf/p908.pdf Sorry, I can't help you with the ATX input as my last use of that software was for the 2011 tax year. Quote Link to comment Share on other sites More sharing options...
SaraEA Posted October 17, 2016 Report Share Posted October 17, 2016 Hahn, this is a confusing area and I think you are confusing two things. When property is foreclosed, you have to distinguish two events. One is the transfer of the property, which results in gain/loss on Form 4797. The other is the cancellation of debt income, which goes on Line 21. CODI comes into play only when the loan is recourse. Your client had a loss on investment property, which is a capital loss. She also had income from the cancelled debt. The insolvency test can erase that. Whether or not EITC is a possibility is a good question. Since Line 21 will show zero after the insolvency subtraction, I would guess she is eligible. For the capital portion, you need to know what her basis was and if there is depreciation recapture. She might not have a loss, and gains cannot be erased by insolvency or the other tests. 1 Quote Link to comment Share on other sites More sharing options...
Recommended Posts
Join the conversation
You can post now and register later. If you have an account, sign in now to post with your account.