Tax Prep by Deb Posted January 30, 2009 Report Share Posted January 30, 2009 I have a client who when she picked up her taxes last year told me that she was going to let go the town house she purchased and let the bank foreclose on it. She made 1 payment in 2008 and sure enough it looks as though they have foreclosed on it in August of 08. The only paperwork my client has received is the notices of foreclosure. She has received no 1099 of any kind except a 1098 from her lender for mortgage interest that they say was paid on the loan in 2008. The amount that is on the 1098 however is over 20,000.00. We both know she didn't pay that but our question is how do they figure it, is it deductible for her, are we missing pieces to this puzzle? Hopefully someone can give me some insight. I knew I would be dealing with a lot of foreclosure type issues this year, however this one is a bit confusing to me. I have advised the client to call the lender and try to get some clarification herself. But if anyone can give me some additional info I would surely appreciate it! Deb! Quote Link to comment Share on other sites More sharing options...
joanmcq Posted January 30, 2009 Report Share Posted January 30, 2009 Well its still pretty early for the 1099s. What bank was it? At least one bank I've heard of was issuing incorrect 1098s. was it a recourse or nonrecourse loan.? A nonrecourse loan won't result in COD income. Quote Link to comment Share on other sites More sharing options...
Tax Prep by Deb Posted January 30, 2009 Author Report Share Posted January 30, 2009 It was a nonrecourse loan I'm sure, but will have client double check. What I really question is the 1098 that listed 21,000.00. The lender was Chase Deb! Quote Link to comment Share on other sites More sharing options...
Janitor Bob Posted January 30, 2009 Report Share Posted January 30, 2009 I would not expect a 1099-C (Cancellation of debt) until this time next year (the amount of debt settled depends on what the bank can sell it for...and that may not happen for many months). ....But I am also confused by that interest amount on the 1098....could that be lifetime interest instead of just 2008? ...Please post if you figure it out. Quote Link to comment Share on other sites More sharing options...
Lion EA Posted January 30, 2009 Report Share Posted January 30, 2009 Had she not paid interest for awhile? And, then the interest got paid off by the buyer? Was there an auction or sale? Did the estate pay a percentage of the interest she owed? Quote Link to comment Share on other sites More sharing options...
Tax Prep by Deb Posted January 31, 2009 Author Report Share Posted January 31, 2009 She was current until around February of 2008. She was notified that the townhouse would be sold at auction at a future date. She has never received anything stating when or if the auction has taken place or whether or not the property has been sold. What estate? This was a single lady who walked away from the property and it was foreclosed on. We do not know were the $21,000.00 in interest has come from. If she had re-financed I would assume part of it was due to a pre-payment penalty, but this was not the case. Deb! Quote Link to comment Share on other sites More sharing options...
Lion EA Posted January 31, 2009 Report Share Posted January 31, 2009 The bankruptcy estate, it's a separate entity from her. Time to call the recipient of the interest. Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted January 31, 2009 Report Share Posted January 31, 2009 It could be that the home was sold, and the proceeds applied first to interest, but I'd sure question the issuer of the 1098, to be sure. Perhaps at the same time you can get info on any canceled debt? Quote Link to comment Share on other sites More sharing options...
Tax Prep by Deb Posted January 31, 2009 Author Report Share Posted January 31, 2009 KC I do have a bit more info. Client contacted lender and all that they could say is that they were required to furnish IRS this information. She did in fact get a copy from the lender of a 1099C that shows the amount of the debt cancelled as well as the fair market value of the property at the time of cancelled debt. It is my understanding that the loan was an interest only loan. But that leads me to another question. This was the original loan used to purchase the home, it was never re-financed ect.... Were they writing loans for purchases that were interest only? Does anyone know? I don't have the 1099C in front of me tonight, but I will let you specifically some figures, and if anyone can give me direction on what to do next I would sure appreciate it. I knew I would be getting some of these foreclosure situations, and am sure when I do one or two I will feel more comfortable, until then I would really appreciate some help! Thanks, Deb! Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted January 31, 2009 Report Share Posted January 31, 2009 Well, is the amount the house sold for enough that the interest could have been that high? It is possible, but without some numbers, it's hard to speculate. And yes, some purchase loans were STARTED as Interest Only, then after a specified period of time, they convert to normal, interest and principle terms. That is the point, of course, where a lot of folks could not handle the new higher payments. I know it sounds stupid to make that kind of loan. But while prices were rising, it seemed to many as if they could not lose, because they expected to either be able to refi, or sell at a profit, and that would take care of the problem. Now, they are paying the price of that mistake. Just remember, you do not have to anguish over this too much. As long as the bank says it is correct, and it's within the range of possibility based on the sale, it's not something you have to 'prove'. You can do the return with the documentation you get, as long as it is not clearly, on it's face, in error. Quote Link to comment Share on other sites More sharing options...
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