Possi Posted February 20, 2019 Report Share Posted February 20, 2019 My clients had a rental and they sold it as a short sale. The loss is on the sale is $46k. They sold it in April 2018 and said there would be no 1099C issued, but my clients aren't real smart. What should I do when all I have is the closing papers, and the price is clearly a loss? What if they get a 1099C and I have to claim cancelled debt? If anything can go wrong, it will. These clients always bring drama to the simplest situations, so this will bomb on me, I just know it. Quote Link to comment Share on other sites More sharing options...
Terry D EA Posted February 20, 2019 Report Share Posted February 20, 2019 Only thing I see is prepare the return from the Hud1 which should show all of the terms of the sale. If the clients get a 1099C, then amend. Client's like this drive me crazy. Explain to them upfront what the possibilities are, maybe make notes to give them to CYA. 1 Quote Link to comment Share on other sites More sharing options...
BulldogTom Posted February 20, 2019 Report Share Posted February 20, 2019 Do an insolvency calculation immediately before the sale to see if you can exclude when the 1099C comes. I think this is covered in one of the pubs. Something in the back of my head says the adjusted basis of the property may not exceed the amount of the debt cancelled. But don't quote me on that, I don't have time to make sure I am right. Tom Modesto, CA 1 Quote Link to comment Share on other sites More sharing options...
Lion EA Posted February 20, 2019 Report Share Posted February 20, 2019 You deal with the sale of the rental in the year it was sold. You deal with Form 1099-C in the year on the form. How long mortgage holders have to write off their losses/issue 1099-Cs is state by state. So, warn your clients, probably in writing/email, that they may have income from forgiven debt in a future year. Quote Link to comment Share on other sites More sharing options...
Pacun Posted February 20, 2019 Report Share Posted February 20, 2019 Lion is correct. Let's say that they sold the house in April 20, 2018. Report the sale and the gain or the loss, if appropriate, in 2018 filing. Short sale doesn't necessarily means they lost money. Being solvent or insolvent on April 19, 2018 has no bearing on the future 1099-C. So let's say in May 17, 2020, the bank issues them a 1099-C for 64K, then you will have to see if they were insolvent on May 16, 2020. Quote Link to comment Share on other sites More sharing options...
Terry D EA Posted February 20, 2019 Report Share Posted February 20, 2019 <<<<<< Being solvent or insolvent on April 19, 2018 has no bearing on the future 1099-C.>>>>>> Why not? It may not have any bearing on the date the 1099C was issued but it will have bearing as to whether insolvency existed the date the debt was forgiven. The date the debt was forgiven should be on the 1099C. The paragraph below is from IRS topic 431 Canceled debt. Lion is correct as to how to handle the rental sale but you will deal with the 1099C when and if your client receives it. I agree with Tom, do the insolvency prior to the sale and keep that to prove insolvency if needed. The original return will have to be amended to reflect the cancelation of the debt in the year the debt was cancelled and to report the insolvency. After a debt is canceled, the creditor may send you a Form 1099-C.pdf, Cancellation of Debt, showing the amount of cancellation of debt and the date of cancellation, among other things. If you received a Form 1099-C showing incorrect information, contact the creditor to make corrections. For example, if the creditor is continuing to try to collect the debt after sending you a Form 1099-C, the creditor may not have canceled the debt and, as a result, you may not have income from a canceled debt. You should verify with the creditor your specific situation. Your responsibility to report the taxable amount of canceled debt as income on your tax return for the year when the cancellation occurs doesn't change whether or not you receive a correct Form 1099-C. Quote Link to comment Share on other sites More sharing options...
Lion EA Posted February 20, 2019 Report Share Posted February 20, 2019 Lisa Ihm's BrassTax.com has free practice aids, such as COD worksheets: https://brasstax.com/practice-aids She used to offer a $20 textbook on Forms 1099-A/foreclosures and Forms 1099-C/COD income and exclusion. Don't see it today on her website. Quote Link to comment Share on other sites More sharing options...
Possi Posted February 20, 2019 Author Report Share Posted February 20, 2019 Wow, thanks for all your input! I just got back to this. I agree with @Terry D. Clients like this are why I drink. Not really. Fine wine is the reason I drink... I'll prepare the return as is. I'll deal with insolvency on the date the debt was cancelled. And I should get a snapshot of the insolvency on the date of the sale in case that is the date of forgiven debt... if it is forgiven... if the 1099C is ever issued. I feel like a dagger is coming at me. I don't own this. I don't own this. I don't own this. Ok, I'm ok. breathe..... 21 minutes ago, Lion EA said: Lisa Ihm's BrassTax.com has free practice aids, such as COD worksheets: https://brasstax.com/practice-aids She used to offer a $20 textbook on Forms 1099-A/foreclosures and Forms 1099-C/COD income and exclusion. Don't see it today on her website. Those worksheets are a beautiful thing, aren't they? Thanks. So. Much. 2 Quote Link to comment Share on other sites More sharing options...
Lee B Posted February 20, 2019 Report Share Posted February 20, 2019 This will give you a good overview: https://www.irs.gov/taxtopics/tc431 I find Pub 4681 to be a good resource with lots of examples. Quote Link to comment Share on other sites More sharing options...
Possi Posted February 20, 2019 Author Report Share Posted February 20, 2019 thanks! Quote Link to comment Share on other sites More sharing options...
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