ed_accountant Posted February 19, 2011 Report Share Posted February 19, 2011 Hi, I want confirm I am handling this correctly: Client was foreclosed on a rental property in June 2010. Client received form 1099-A. Client did not receive form 1099-C and bank is still holding property in year 2011 and has property listed for sale. On the 2010 income tax return, I will report the rental property as a sale based on the 1099-A abandonmant date and estimated FMV at that time. We will not report the cancellation of debt since as of 12/31 it was not cancelled and no 1099- C was received. In summary, client reports the sale of property in year 2010 but needs to report the 1099-C cancellation of debt income in a future year if bank cancels debt. Is this correct? Thanks Quote Link to comment Share on other sites More sharing options...
Catherine Posted February 20, 2011 Report Share Posted February 20, 2011 Hi, I want confirm I am handling this correctly: Client was foreclosed on a rental property in June 2010. Client received form 1099-A. Client did not receive form 1099-C and bank is still holding property in year 2011 and has property listed for sale. On the 2010 income tax return, I will report the rental property as a sale based on the 1099-A abandonmant date and estimated FMV at that time. We will not report the cancellation of debt since as of 12/31 it was not cancelled and no 1099- C was received. In summary, client reports the sale of property in year 2010 but needs to report the 1099-C cancellation of debt income in a future year if bank cancels debt. Is this correct? Thanks I believe so -- and lots of times that 1099-C comes after the individual is no longer insolvent, so they end up paying tax on the cancelled debt. But there is no rushing the 1099-C. The banks just don't care. Just like they can't be bothered to approve a short sale and get the bad asset off their books. Quote Link to comment Share on other sites More sharing options...
jainen Posted February 20, 2011 Report Share Posted February 20, 2011 >>1099-C comes after the individual is no longer insolvent... The banks just don't care<< Please explain why the bank should favor a borrower who can afford to honor his commitment but chooses not to. Quote Link to comment Share on other sites More sharing options...
Catherine Posted February 20, 2011 Report Share Posted February 20, 2011 >>1099-C comes after the individual is no longer insolvent... The banks just don't care<< Please explain why the bank should favor a borrower who can afford to honor his commitment but chooses not to. You do like to make a ruckus, don't you, jainen? Where did I say that a bank _should_ care? I stated that they don't, and nothing else. The piece I don't understand is why the banks don't care about getting a decent price for a "toxic asset" and converting that asset from a near-complete liability into a zero-or-very-small written-off loss and move on. So many people I've dealt with have tried to buy houses on short sales for at or _above_ the outstanding loans -- and the bank can't be bothered to give permission. Many of those sales then fall through because the buyer needs a place to live and moves on to more amenable sellers after the expiration of the approval time. Were I a shareholder in some of these banking companies, I'd be putting up a royal stink about that. Quote Link to comment Share on other sites More sharing options...
samingeorgia Posted February 21, 2011 Report Share Posted February 21, 2011 OK, let's think this through. Say I owe $ 150,000 on a piece of real estate that has a basis of $ 120,000. The bank forecloses and I get a 1099-A for $ 150,000. I report the sale on my tax return for 2010, showing the gain. In 2011, the bank sends me a 1099-C for $ 20,000 because they sold it for $ 130,000? How do I have any gain? It seems to me that the 1099-A completes the transaction between me and the bank and there is no need for the 1099-C. If they sold it for some amount less than the debt, so what? If they sold it for $ 160,000 would they send me the $ 10,000 profit? I had a similar situation about two weeks ago with a client on a piece of rental property. The sale was reported on 4797. In my client's case, the gain was offset by capital loss carryovers. The 1099-A had an entry in the block for FMV of about $ 115,000. The client has an appraisal for more than that; close to what he owed. Should I have reported the sale amount at the FMV, showing an artificial loss? In that case, I can see the applicability of the 1099-C. My reasoning is that recognized income creates basis. So if they send my client a 1099-C in 2011, I'll show an amount of basis equal to whatever is on the 1099-C, hence zero gain in 2011. What say you? Quote Link to comment Share on other sites More sharing options...
samingeorgia Posted February 21, 2011 Report Share Posted February 21, 2011 Catherine, they do the same here in Georgia. Either the banks are afraid to make a decision or Uncle Sugar is going to take care of whatever they lose. Quote Link to comment Share on other sites More sharing options...
Catherine Posted February 21, 2011 Report Share Posted February 21, 2011 Catherine, they do the same here in Georgia. Either the banks are afraid to make a decision or Uncle Sugar is going to take care of whatever they lose. And by "Uncle Sugar" you mean you, me, our kids, our grand-kids, and _their_ kids and grand-kids. Quote Link to comment Share on other sites More sharing options...
samingeorgia Posted February 22, 2011 Report Share Posted February 22, 2011 Catherine: You got it! 1 Quote Link to comment Share on other sites More sharing options...
Pacun Posted February 22, 2011 Report Share Posted February 22, 2011 OK, let's think this through. Say I owe $ 150,000 on a piece of real estate that has a basis of $ 120,000. The bank forecloses and I get a 1099-A for $ 150,000. I report the sale on my tax return for 2010, showing the gain. In 2011, the bank sends me a 1099-C for $ 20,000 because they sold it for $ 130,000? How do I have any gain? It seems to me that the 1099-A completes the transaction between me and the bank and there is no need for the 1099-C. If they sold it for some amount less than the debt, so what? If they sold it for $ 160,000 would they send me the $ 10,000 profit? I had a similar situation about two weeks ago with a client on a piece of rental property. The sale was reported on 4797. In my client's case, the gain was offset by capital loss carryovers. The 1099-A had an entry in the block for FMV of about $ 115,000. The client has an appraisal for more than that; close to what he owed. Should I have reported the sale amount at the FMV, showing an artificial loss? In that case, I can see the applicability of the 1099-C. My reasoning is that recognized income creates basis. So if they send my client a 1099-C in 2011, I'll show an amount of basis equal to whatever is on the 1099-C, hence zero gain in 2011. What say you? This is the way I see it. You have a house that you no longer can pay because you were greedy and didn't want to rent an apartment that you could afford. But let's leave that discussion for another topic. You owed the bank $300,000. Since you couldn't sell in short sell and didn't have a leg to stand on, the bank made you an offer that you could not legally refuse. The bank offered you $100,000 based on the market value and took your house. YOU NO LONGER HAVE A HOUSE. If you file your taxes and report $200,000 loss. It is a personal loss, no need to mention it on your return. If the bank sells the house for $125,000, you have a cancellation of debt of $175,000, which according to the code it is taxable unless you are insolvent. You are tied to the papers you signed when you purchased the house and to the IRS code. The paper said that you were personally liable for the debt. If the bank sells, your former house for $700,000, the bank will report $400,000 capital gain or ordinary income on its return and will not issue you a 1099-C. Remember that at this point, you don't have a house and therefore you cannot have a profit. The house went back to the bank and only the owner of an asset can benefit from any profit. To answer original question (since no one tried to): If it was pure rental, you dispose the asset on a loss for 2010. Claim the loss and report 1099-C the year it shows up. Technically you could report everything in 2010: The disposal of the asset, the loss on the rental asset, and the cancellation of debt. For matching purposes, you should report the cancellation of debt in the year the 1099-C is issued by the bank. Quote Link to comment Share on other sites More sharing options...
joanmcq Posted February 22, 2011 Report Share Posted February 22, 2011 Catherine, if the offer is at or above the outstanding loan price, its no longer a 'short sale'. Its just a sale. For it to be a short sale, the bank has to agree to accept less than the balance of the loan. Now there were probably second mortgages that were above what was being offered and those lenders have to sign off too. and they get NOTHING, not even the house since they are second in line. Quote Link to comment Share on other sites More sharing options...
Catherine Posted February 22, 2011 Report Share Posted February 22, 2011 Catherine, if the offer is at or above the outstanding loan price, its no longer a 'short sale'. Its just a sale. For it to be a short sale, the bank has to agree to accept less than the balance of the loan. Now there were probably second mortgages that were above what was being offered and those lenders have to sign off too. and they get NOTHING, not even the house since they are second in line. I have had THREE clients in the past year try to buy houses in what the Realtors termed "short sales", where the amount offered DID cover the outstanding unpaid mortgage plus outstanding property taxes, etc. TWO of those sales fell through because the banks COULD NOT BE BOTHERED to approve the sale before the offer expired -- even when both of those sales extended the offer date at least twice each. The third sale eventually DID go through, when the buyers extended the bank's "respond-by" date FOUR times and finally the President of the small local bank that was going to be giving the new mortgage loan called the big-box bank's local VP and reamed him a new one (politely). That finally got big-box-bank to approve a sale they should have approved the instant they knew their costs were covered. Perhaps none of these were "short sales" in the exact definition of the term -- but all were TREATED as short sales by realtors and banks alike. So for all intents and purposes, they were indeed short sales. Or, would have been, had they gone through. Catherine Quote Link to comment Share on other sites More sharing options...
joanmcq Posted February 23, 2011 Report Share Posted February 23, 2011 Then I have no idea why the realtors were treating them as a short sale; if an offer is greater than the liability, the bank doesn't have to approve the sale, the house is just sold, and the proceeds pay off the loan(s). Quote Link to comment Share on other sites More sharing options...
Gail in Virginia Posted February 23, 2011 Report Share Posted February 23, 2011 I am wondering if these were considered short sales because even though the offer was for as much or more than the principal due on the mortgage, it did not cover the past due interest payments. Otherwise, I tend to agree with Joan, it wasn't really a short sale. Quote Link to comment Share on other sites More sharing options...
Pacun Posted February 23, 2011 Report Share Posted February 23, 2011 There is one event that needs to be present for it to be considered a short sale. Correct me if I am wrong. Client has not complied with the agreement he signed with the bank or the selling price doesn't cover the debt. Quote Link to comment Share on other sites More sharing options...
TAXMAN Posted February 24, 2011 Report Share Posted February 24, 2011 What would happen if this were a personal residence. TP gets 1099A but no 1099C Do we need to really do anything? Quote Link to comment Share on other sites More sharing options...
Pacun Posted February 24, 2011 Report Share Posted February 24, 2011 What would happen if this were a personal residence. TP gets 1099A but no 1099C Do we need to really do anything? Report the sale and state it is a personal loss, so no deduction. Quote Link to comment Share on other sites More sharing options...
GOIN CRAZY Posted April 8, 2011 Report Share Posted April 8, 2011 I need help - I have been to 3 cpas in the last month with three different answers - hoping you can match at least one of them: Similar situations as above: Husband had a rental property (actually 4 but lets just deal with this one for now) and that property was included in a bankruptcy discharged in 2009. He had no activity in the rental after the discharge. Property was forclosed in 2010 - not necessarily sold - just received the 1099a for 2010. Did not receive a 1099c. Is this the solution: Claim loss on 4797 for 2010 return, wait until a 1099c is issued and then deal with the 1099c if and when it is issued? If it is issued, because of his Chapter 7 (Part of Title 11 bankruptcy) could he use form 982 Line 1a to offset the income for the cancellation of debt? I also have heard that if the 1099c is issued to amend the 2010 return form 4797 to adjust the basis? PLEASE HELP! Quote Link to comment Share on other sites More sharing options...
Pacun Posted April 8, 2011 Report Share Posted April 8, 2011 I need help - I have been to 3 cpas in the last month with three different answers - hoping you can match at least one of them: Similar situations as above: Husband had a rental property (actually 4 but lets just deal with this one for now) and that property was included in a bankruptcy discharged in 2009. He had no activity in the rental after the discharge. Property was forclosed in 2010 - not necessarily sold - just received the 1099a for 2010. Did not receive a 1099c. Is this the solution: Claim loss on 4797 for 2010 return, wait until a 1099c is issued and then deal with the 1099c if and when it is issued? If it is issued, because of his Chapter 7 (Part of Title 11 bankruptcy) could he use form 982 Line 1a to offset the income for the cancellation of debt? I also have heard that if the 1099c is issued to amend the 2010 return form 4797 to adjust the basis? PLEASE HELP! What makes you think that we can give you better information than those CPAs who sat with you and checked the papers? In any event, you will be double dipping if you do that. Why don't you list what each of the 3 CPAs said and we are going to support the one with the most logic. Quote Link to comment Share on other sites More sharing options...
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