Tax Prep by Deb Posted April 11, 2009 Report Share Posted April 11, 2009 I have been working on this one and going in circles. I would appreciate anyones thoughts! My client abandoned their home (Prior to doing so they purchased another home where they now live) In August of 08 their home was foreclosed upon and they received a 1099-C. The figures on the 1099-C are as follows: Box 2 amount of debt canceled $393,534.71 (of which I verified from lender's statement to be the actual amount owed at time of foreclosure). Box 7 FMV of property $416,748.00 which exceeds the amount canceled. My client challenged the FMV value as other homes in same condition and size are selling for less than $200,000.00 but the mortgage company says they will not change the value. My question is that because they are claiming the fair market value is more than the amount cancelled, do my clients have to include the cancelled debt as income? It seems to me that by the mortgage's own admission the property has more than paid the former debt. Again I want to emphasize that my client's year end summary clearly shows that the total amount due on this loan at time of foreclosure was in fact the $393,534.71. So therefore adding the box 2 and box 7 would be incorrect. By the way I am absolutely sure of this as I have every closing doc, ect... from the time they purchase the home, all of it's refinances, ect... up to the day of the foreclosure. Second question: If there is no cancellation of debt for my clients to claim, how do I handle this 1099C? Do i ignore it other than reporting the sale or do I need to do something else to show IRS that we have acknowledge the info? Thanks to all who may respond! Deb! Quote Link to comment Share on other sites More sharing options...
Tax Prep by Deb Posted April 11, 2009 Author Report Share Posted April 11, 2009 Any takers? Deb! Quote Link to comment Share on other sites More sharing options...
Jerry W Posted April 12, 2009 Report Share Posted April 12, 2009 I have been working on this one and going in circles. I would appreciate anyones thoughts! My client abandoned their home (Prior to doing so they purchased another home where they now live) In August of 08 their home was foreclosed upon and they received a 1099-C. The figures on the 1099-C are as follows: Box 2 amount of debt canceled $393,534.71 (of which I verified from lender's statement to be the actual amount owed at time of foreclosure). Box 7 FMV of property $416,748.00 which exceeds the amount canceled. My client challenged the FMV value as other homes in same condition and size are selling for less than $200,000.00 but the mortgage company says they will not change the value. My question is that because they are claiming the fair market value is more than the amount cancelled, do my clients have to include the cancelled debt as income? It seems to me that by the mortgage's own admission the property has more than paid the former debt. Again I want to emphasize that my client's year end summary clearly shows that the total amount due on this loan at time of foreclosure was in fact the $393,534.71. So therefore adding the box 2 and box 7 would be incorrect. By the way I am absolutely sure of this as I have every closing doc, ect... from the time they purchase the home, all of it's refinances, ect... up to the day of the foreclosure. Second question: If there is no cancellation of debt for my clients to claim, how do I handle this 1099C? Do i ignore it other than reporting the sale or do I need to do something else to show IRS that we have acknowledge the info? Thanks to all who may respond! Deb! Deb, This link may answer your question. http://www.irs.gov/irs/article/0,,id=179073,00.html JerryW Quote Link to comment Share on other sites More sharing options...
Tax Prep by Deb Posted April 12, 2009 Author Report Share Posted April 12, 2009 Deb, This link may answer your question. http://www.irs.gov/irs/article/0,,id=179073,00.html JerryW This would be soooooo easy if only this was their main home, but about 9 months before the date of foreclosure they purchased a new home and moved into it. At the time of the foreclosure this was not their main home, at least the way I see it. As to the other ways to not to have to claim it as income, insolvency was my best bet however I can't make it all go away they will still be left with about 50,000 of cancelled debt. My point is that the mortgage company will not budge on the FMV even though it's easily disproved through comp sales and listings for same homes in the area. If I simply go with the figures on the 1099C it appears that the FMV of the home more than satisfied the loan balance, therefore as I see it their should be no cancelled debt. I would not have a problem at all if the form was a 1099A, I would report the sale and be done with it. But this shows a cancellation of debt, so I know I have to deal with it. Deb! Quote Link to comment Share on other sites More sharing options...
David1980 Posted April 12, 2009 Report Share Posted April 12, 2009 Based on the information here, it seems that they should have gotten a 1099-A instead of a 1099-C. You could report it like you would for a 1099-A and advise the client to call you if they get an IRS letter to explain. You could try putting an explanation in an IRS preparer note, but it doesn't seem like anyone reads those anyway. Or following the instructions for recipients on the 1099-C you could try contacting the creditor and asking why they issued a 1099-C in the first place when FMV was more than the loan outstanding. Quote Link to comment Share on other sites More sharing options...
Tax Prep by Deb Posted April 12, 2009 Author Report Share Posted April 12, 2009 Based on the information here, it seems that they should have gotten a 1099-A instead of a 1099-C. You could report it like you would for a 1099-A and advise the client to call you if they get an IRS letter to explain. You could try putting an explanation in an IRS preparer note, but it doesn't seem like anyone reads those anyway. Or following the instructions for recipients on the 1099-C you could try contacting the creditor and asking why they issued a 1099-C in the first place when FMV was more than the loan outstanding. The creditor has been contacted and advised of the error's however there stand is that they will not correct it. The say it is what it is. Thanks for your reply! Deb! Quote Link to comment Share on other sites More sharing options...
LindaB Posted April 13, 2009 Report Share Posted April 13, 2009 The creditor has been contacted and advised of the error's however there stand is that they will not correct it. The say it is what it is. Thanks for your reply! Deb! I think you should accept that it 'is what it is.' The way it's reported there is no COD income. Just report the sale. It could have been reported on a 1099-A as David1980 said, but it seems that in many cases lenders use a 1099-A when it is nonrecourse debt and a 1099-C when it is recourse debt. That's just the impression I have gotten over the last few years from following the questions on these. Quote Link to comment Share on other sites More sharing options...
Tax Prep by Deb Posted April 13, 2009 Author Report Share Posted April 13, 2009 I think you should accept that it 'is what it is.' The way it's reported there is no COD income. Just report the sale. It could have been reported on a 1099-A as David1980 said, but it seems that in many cases lenders use a 1099-A when it is nonrecourse debt and a 1099-C when it is recourse debt. That's just the impression I have gotten over the last few years from following the questions on these. Thanks LindaB, I was hoping you would chime in on this. I had come to the conclusion this weekend that this is what I was going to do, but I really respect your imput on this and other issues regarding these foreclosure messes this year. I have paperwork in the clients folder that will substantiate our decision, providing of course the mortgage holder doesn't make any changes which they have indicated that under no circumstance will they. So at least I can wrap this one up, now just one more to go however this one will be much easier as it was their main home prior to foreclosure! Deb! Quote Link to comment Share on other sites More sharing options...
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