Just need a little confirmation on 1099A's

[Tax Prep by Deb]

I have several clients who have only been issued a 1099A and not a 1099C (yet). A couple of these are clearly marked as my client not being personally liable for the loan. One is marked that they are personally liable for the loan.

With the ones that are marked not personally liable, will a 1099C follow when the home is resold by the lender? Do I handle the 1099A as a sale using the amount that was owed on the property as the sales price and then apply all the other info regarding a sale of personal residence? (most of my cases have been showing a profit as they owed more on the loan as reported on the 1099A than what they originally purchase the home for, however because it was their personal residence for at least 2 out of the last 5 years they qualify for the exclusion) Is that all I need to do for the 1099A's and what happens if in 2009 they receive a 1099C for these non-recourse loans?

What about the 1099A that shows homeowner is personally liable for loan but no 1099C has been issued? Do I still report the sale (abandonment) on the Schedule D sales of personal residence? Then deal with the 1099C when and if it issued? Will I have to go back and ammend the 2008 when the 1099C shows up for tax year 2009?

I have a slew of these as I live in a part of the state that is hardest hit with foreclosures and any suggestion would be greatly appreciated!

Deb!

[RoyDaleOne]

Since, I do not live in California, or a state that has similar laws about residential mortgages, I am totally unfamiliar with the concept of non-recourse residential mortgages.

In states that allow a deficit on foreclosure of the mortgage the question becomes when do you have COD. The note holder can foreclose on the property, and, if there is a deficiency on the loan seek restitution for deficit from mortgagor. Obliviously, if the note holder seeks sure restitution there has been no forgiveness of debt and no COD income.

Reg. 1.1001-2

Reg 1.1001-2(a) and Commissioner v. Tufts 461 U.S. 300 (1983)

If the property is sold in a foreclosure sale, the general rule is that the amount realized equals the greater of the sales proceeds, or the face amount of the debt provided the sale is to a third party, and equals the bid price if the sale is to the creditor.

If the foreclosure is of the taxpayer's principal residence, and if the foreclosure proceeds exceed the taxpayer's basis, gain may be excluded from income if the requirements for the exclusion are met.

Sec 165©: further, if the foreclosure proceeds are less than the taxpayer's basis a loss may not be recognized for the personal residence.

In addition, discharge of indebtedness income may be recognized under Code Section 103 with respect to property sold in a foreclosure sale.

Also, Reg. 1.1002-2 provides:

(i) The sale or other disposition of property that secures a non-recourse liability discharges the transferor from the liability;

There is no COD income IF the loan is recourse until the loan is forgiven.

See the tests for "forgiven".

Therefore, see the above about gain or loss concerning "straight foreclosure".

Situation A:

Year 1 = Foreclosure (1099A)

Year 2 = Debt forgiveness (COD) (1099C)

Situation B:

Year 1 = Foreclosure and debt forgiveness (COD) (1009C)

Bankruptcy, or insolvency and the new rules about your residence may provide a different procedure than from the above.

[LindaB]

"I have several clients who have only been issued a 1099A and not a 1099C (yet). A couple of these are clearly marked as my client not being personally liable for the loan. One is marked that they are personally liable for the loan."

I'm a little surprised that an individual would have a nonrecourse loan. When I did some research a year or two ago it seemed that nonrecourse loans were generally only used for commercial loans. But I guess they would write nonrecourse mortgage loans if they thought the value of the property would always be more than the loan.

"With the ones that are marked not personally liable, will a 1099C follow when the home is resold by the lender?"

They should not get a 1099-C for a nonrecourse loan.

"Do I handle the 1099A as a sale using the amount that was owed on the property as the sales price and then apply all the other info regarding a sale of personal residence?"

Yes

"(most of my cases have been showing a profit as they owed more on the loan as reported on the 1099A than what they originally purchase the home for, however because it was their personal residence for at least 2 out of the last 5 years they qualify for the exclusion)"

Since you raise the point that some of these loans were for more that what they paid for the house, in the case of a recourse loan where there is or might be COD, you would need to know if some of the loan was used to pay off credit cards or for anything else besides buying or improving the house. To be able to exclude COD income for 'qualified principal residence indebtedness' it can only be the part of the debt for the home. I don't mean to confuse things here, what I just said applies to COD income that might be excluded on form 982, not the gain from showing the sale.

"Is that all I need to do for the 1099A's and what happens if in 2009 they receive a 1099C for these non-recourse loans?"

They shouldn't receive a 1099-C for a nonrecourse loan. If they do, then the lender was confused. I think the only thing you can do now is put in preparer notes that the taxpayer received a 1099-A, and then assume they won't get a 1099-C and then not think about it anymore.

"What about the 1099A that shows homeowner is personally liable for loan but no 1099C has been issued? Do I still report the sale (abandonment) on the Schedule D sales of personal residence? Then deal with the 1099C when and if it issued?"

Yes, that's all you can do now. As RoyDaleOne indicated in his post, the lender still has the option of trying to collect the amount of the loan that wasn't satisfied by the property. You may want to put in preparer notes that this is a recourse loan, so that you're not surprised if they get a 1099-C later.

"Will I have to go back and ammend the 2008 when the 1099C shows up for tax year 2009?"

No, you wouldn't want to amend 2008, you would include it on 2009, whether it had to be included as ordinary income or could be excluded on form 982.

"I have a slew of these as I live in a part of the state that is hardest hit with foreclosures and any suggestion would be greatly appreciated!"

Just look at each case individually because there isn't a 'one size fits all' answer for how to deal with these.

[Tax Prep by Deb]

Thank you LindaB

This is what I have researched, but it always help if someone else can confirm your findings. I have been looking at each one of these on an individual bases but like you said there is no one size fits all. At least one of these I will be going the route of insolvency because of the amount of equity used for other purposes that is owed. But this too leads to me one more question.

I have a couple of clients who actually went out and purchased a second home knowing that they would be letting the other home go. They moved into the new home, stopped making payments on the old home, the hold home was foreclosed and the 1099's were issued.

It is my thinking that because they already purchased and moved into another home that the exclusion for having to include the foregiven debt as income would not fly under the provision of foregivess of indebtedness of primary home. Am I correct in my understanding of this? I can easily show insolvency as both homes have lost a lot of value since they were purchased and on both of these homes there is more owed than they were worth at the time the debt was foregiven on the first home.

Any thoughts! (as to the morality of what they did, I don't agree or approve of it, but that's really not my business. I am only concerned about the tax ramifications.)

Deb!

[LindaB]

I have a couple of clients who actually went out and purchased a second home knowing that they would be letting the other home go. They moved into the new home, stopped making payments on the old home, the hold home was foreclosed and the 1099's were issued.

It is my thinking that because they already purchased and moved into another home that the exclusion for having to include the foregiven debt as income would not fly under the provision of foregivess of indebtedness of primary home. Am I correct in my understanding of this?

I can easily show insolvency as both homes have lost a lot of value since they were purchased and on both of these homes there is more owed than they were worth at the time the debt was foregiven on the first home.

Any thoughts! (as to the morality of what they did, I don't agree or approve of it, but that's really not my business. I am only concerned about the tax ramifications.)

Deb!

Yes, I agree with you on this. Under 'qualified principal residence indebtedness' it says you can have only one principal residence at any one time.

[Tax Prep by Deb]

Yes, I agree with you on this. Under 'qualified principal residence indebtedness' it says you can have only one principal residence at any one time.

Thanks for the confirmation. That was my feeling as well!

Deb!

[joanmcq]

Yeah Deb, they shot themselves in the foot on that one. And as our colleagues in Michigan noticed our purchase money loans are non recourse. But any that owe more than they paid (unless they got an option ARM) must have refi'd and then its no longer a purchase money debt, and is full recourse. And I haven't figured out if someone purchased with an 80/20 if the equity line portion is recourse or nonrecourse. I think its non, but am not sure.

If I remember this when I get to work on Tuesday, on my computer there I have a really nice document that spells out COD & foreclosure & short sales in plain english. Has nice little calculation examples too. But of course I forgot to email it to me at home!

My ex is thinking of walking away from a duplex but when he financed it part was his primary residence, but since his brother, he and I bought it together a year or so earlier, but only his brother was on title, but then he bought out his brother, and got on title BEFORE he got the loan, I think the loan is recourse. I told him to read the loan docs closely.

And you think your transactions are convoluted??

[jainen]

>>I'm a little surprised that an individual would have a nonrecourse loan.<<

It's normal throughout California, where most loans to buy a principal residence are non-recourse as a matter of law. When a non-recourse loan is foreclosed, the property satisfies the debt in full so there is no cancellation of debt.

Foreclosure on a recourse loan might not cancel the debt either, unless the lender wants to. I could understand a bank not releasing a borrower who deliberately bought a new house with the intention of abandoning the old one.

[Tax Prep by Deb]

>>I'm a little surprised that an individual would have a nonrecourse loan.<<

It's normal throughout California, where most loans to buy a principal residence are non-recourse as a matter of law. When a non-recourse loan is foreclosed, the property satisfies the debt in full so there is no cancellation of debt.

Foreclosure on a recourse loan might not cancel the debt either, unless the lender wants to. I could understand a bank not releasing a borrower who deliberately bought a new house with the intention of abandoning the old one.

I totally agree, and my constant suggestion to someone who even suggested doing this was to seek legal advice first. But they do not listen, and then I am expected to clean up their tax mess and have to go through all the explanations ect....

Thanks jainen for responding. I had hoped to hear something from you.

Deb!