Foreclosures *after* BK7 discharge

[Funk4Crunk]

I do not seem to find a subforum for Post Discharge/Foreclosure (I did try a search first). Please feel free to move this, if there is a better subforum.

My Chapter 7 bankruptcy has closed. Included were two mortgages:
1. Home
2. Rental single family home.

It is my understanding that there are no IRS ramifications for "loan forgiveness" for those two mortgages as a result of the BK7.

HOWEVER, I cannot get any answer of any kind regarding the IRS ramifications for the subsequent deed transfer *in future* from me to someone else via foreclosure, short sale, real estate tax sale, or abandonment.

In particular, I am afraid that the deed transfer of the rental property could have catastrophic IRS ramifications for that year, likely 2009 or 2010.

IRS indicates contact BK attorney. BK attorneys indicate contact IRS.

The "debt forgiveness" issue is simply Step 1. What are the tax ramifications when the property is *sold*, particularly rental property vs. owner-occupied?

If the rental property is sold for $75,000 with no mortgage, is the full $75,000 (or a million!) taxable gain (short- or long-term)?

IMPORTANT: If writing off rental property mortgages in a Chapter 7 BK means that that amount effectively becomes *taxable income* upon post-BK deed transfer of any kind, should rental property mortgages *never* be included in a BK??

I specifically asked my BK attorney whether the order should be Foreclosure to BK7 or BK7 to Foreclosure. He simply indicated that once the BK7 was filed, the Foreclosures might be postponed (they weren't - both mortgage companies filed/won motions to remove the 2 properties from the BK stay in order to foreclose, but THEN HAVE DONE NOTHING FURTHER several months later.) There was zero mention of future IRS tax ramifications of a mortgage write-off on a rental. Not his problem??

Upon sale of a rental property, I believe that all depreciation, whether taken or not, is recaptured/taxable as *ordinary income*. Again, $50K, $100K, $1 million?? After a Chapter 7 BK with zero assets and no job?? Doesn't sound like a "clean slate" to me!

With banks walking away from foreclosures, the deed AND THE LIABILITY RISKS remain with the property owner until the deed changes hands.

Real estate tax liens do not force the sale for 2-3 *years*. And I've just been told by the County Clerk's office of my rental property that the County *never* takes the deed even after that 3 year period of real estate taxes in default. So I could be liable FOR YEARS!

My rental property could also have code violations in future with $200/*day* penalties for repairs I cannot afford to make. And property insurance is null and void after 30 days of vacancy-

Why are there no simple examples anywhere online for the various stages ***WITH IRS TAX RAMIFICATIONS AND OWNER LIABILITY RISKS***of these two situations:

OWNER-OCCUPIED
- Foreclosed and sold at auction (past tense)/property ownership transfers
- Foreclosure judgment, but not sold at auction/still in property-owner's name
- Lis Pendens action started/still in property-owner's name
- Greater than 6 months in arrears/no legal action begun/still in property-owner's name

NON-OWNER-OCCUPIED
- Foreclosed and sold at auction (past tense)/property ownership transfers
- Foreclosure judgment, but not sold at auction/still in property-owner's name
- Lis Pendens action started/still in property-owner's name
- Greater than 6 months in arrears/no legal action begun/still in property-owner's name

The real issues for desperate property-owners (owner-occupied *and* rental units) are:
1. HOW DO WE GET THE DEEDS OUT OF OUR NAMES ASAP?
2. ONCE WE DO, HOW MUCH WILL WE OWE THE IRS?

Any pointers would be greatly appreciated-

[justbroke]

I am in no way a tax expert, attorney or CPA. These are my opinions only, so take them for what they are worth.

It is my understanding that there are no IRS ramifications for "loan forgiveness" for those two mortgages as a result of the BK7.

If you do get one of these, and it was included in bankruptcy (IIB), you just complete IRS Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).

HOWEVER, I cannot get any answer of any kind regarding the IRS ramifications for the subsequent deed transfer *in future* from me to someone else via foreclosure, short sale, real estate tax sale, or abandonment.

See above. If you are issues a 1099-A/C, then you just complete IRS Form 982. (More than likely, when completed Form 982, you'll check Box 1a. Discharge of indebtedness in a title 11 case)

In particular, I am afraid that the deed transfer of the rental property could have catastrophic IRS ramifications for that year, likely 2009 or 2010.

Doesn't matter. See above.

IRS indicates contact BK attorney. BK attorneys indicate contact IRS.

You should probably see a tax specialist. When the time comes and you need to file taxes, I'd make sure a competent tax specialist/attorney does your taxes. I've been doing taxes for years (15+) and that Form 982 is complex to me.

The "debt forgiveness" issue is simply Step 1. What are the tax ramifications when the property is *sold*, particularly rental property vs. owner-occupied?

None. You have no liability for the debt. Your indebtedness was discharged in the bankruptcy. Therefore, there is nothing to forgive, really.

If the rental property is sold for $75,000 with no mortgage, is the full $75,000 (or a million!) taxable gain (short- or long-term)?

Nope!

IMPORTANT: If writing off rental property mortgages in a Chapter 7 BK means that that amount effectively becomes *taxable income* upon post-BK deed transfer of any kind, should rental property mortgages *never* be included in a BK??

I don't see how it become taxable. Again, you probably need a good tax attorney. Now, there may be some tax issues with any depreciation or other deductions you took over the years on the Investment Property (Rental Property), as those can be depreciated. This is why you need to see a tax specialist on those issues.

I specifically asked my BK attorney whether the order should be Foreclosure to BK7 or BK7 to Foreclosure. He simply indicated that once the BK7 was filed, the Foreclosures might be postponed (they weren't - both mortgage companies filed/won motions to remove the 2 properties from the BK stay in order to foreclose, but THEN HAVE DONE NOTHING FURTHER several months later.) There was zero mention of future IRS tax ramifications of a mortgage write-off on a rental. Not his problem??

First, the lenders/banks filed the motions because that is the correct procedure! They have to do that so that they can exercise their right of cure at some future time... if and when they decide to do so. There is nothing to force them to exercise their rights to cure the default.

Upon sale of a rental property, I believe that all depreciation, whether taken or not, is recaptured/taxable as *ordinary income*. Again, $50K, $100K, $1 million?? After a Chapter 7 BK with zero assets and no job?? Doesn't sound like a "clean slate" to me!

Now that is your issue and I mentioned it above. If you did depreciate it, you may have tax issues related to that. Again, I ask that you seek professional tax advice as this is not a bankruptcy issue. It's a tax issue that would happen if you had just sold the property yourself.

With banks walking away from foreclosures, the deed AND THE LIABILITY RISKS remain with the property owner until the deed changes hands.

Absolutely.

My rental property could also have code violations in future with $200/*day* penalties for repairs I cannot afford to make. And property insurance is null and void after 30 days of vacancy-

Usually, the Bank/Lender will pay property preservation fees to maintain the property so that it doesn't incur fees. The violations attach to the property and the City/County/State/HOA could enforce the violations -- if legally allowed -- through a foreclosure action themselves. This will usually get the bank off it's butt.

Why are there no simple examples anywhere online for the various stages ***WITH IRS TAX RAMIFICATIONS AND OWNER LIABILITY RISKS***of these two situations

Without repeating them, because each tax situation is unique. I think this is not a simple tax issue when it comes to an Investment Property, included in Bankruptcy, pending foreclosure, property tax liens, not yet foreclosed upon.

1. HOW DO WE GET THE DEEDS OUT OF OUR NAMES ASAP?

I think a back-door way of doing this, is to just list the property for 90 days, and then do a deed-in-lieu. yes, this is work on your part, and a Realtor's part, but hey, if it sells (likely a short sale anyhow), then you're off the hook too.

2. ONCE WE DO, HOW MUCH WILL WE OWE THE IRS?

That's a question for a tax professional (CPA or tax attorney) to render. They can speculate, but I don't care to. Your main issue will be with recapture tax.

[Funk4Crunk]

IRS Form 982 - Important form

I am in no way a tax expert, attorney or CPA. These are my opinions only, so take them for what they are worth.

If you do get one of these, and it was included in bankruptcy (IIB), you just complete IRS Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).

Thank you very much for the information. I had just heard of Form 982 from a realtor in this past week.

Actually, it is that Form 982/*Basis Adjustment* reference that is what concerns me: http://www.irs.gov/pub/irs-pdf/f982.pdf

My assumption is that if my BK7 with mortgage write-offs had occurred on 12/31/2008 that this is the form that would be required to not be taxed on the "debt forgiveness" aspect of the write-offs in 2008.

I believe I would check both 1d and 1e (discharge of qualified real property business indebtedness and discharge of qualified principal residence indebtedness).

Section II states, "Reduction of Tax Attributes. You must attach a description of any transactions resulting in a reduction of basis under section 1017."

My understanding of determining gain or loss upon sale of any property is the sales price minus the *basis*.

It sure appears that Form 982 w/related information delays the recognition of taxable income from time of write-off/BK to the time of sale at some point in the future.

Would that *not* be the case, if the rental mortgage had not been included in the mortgage? Then, the normal foreclosure or short sale rationales would have been applied (I'm still not even sure that rental properties can be short sold with no "debt forgiveness" ramifications, either).

An IRS reply gave me this link/article: Home Foreclosure and Debt Cancellation

http://www.irs.gov/newsroom/article/0,,id=174034,00.html

Two critical statements:
- Debts discharged through bankruptcy are not considered taxable income.


I believe the $250,000 Homeowner's Credit likely makes that basis issue a moot point for sale of the owner-occupied property for most people.

However, it certainly appears that the bankruptcy discharge of the *rental property mortgage* definitely decreases the cost basis, which means that that decrease in the basis *now* will increase the taxable gain at time of deed transfer in the *future*.

Bankruptcy Tax Guide/Form 908: http://www.irs.gov/pub/irs-pdf/p908.pdf

From the www.irs.gov site, these other publications are also of relevance:
523, Selling Your Home (for the period before you filed for bankruptcy)
525, Taxable and NonTaxable Income
527, Residential Rental Property
544, Sales and Other Dispositions of Assets
550, Investment Income and Expenses

I also am not an expert of any kind. However, many years ago I *was* a CPA, so I should be capable of reading/comprehending these (reams) of IRS publications (it's also why I never went into the tax preparation business!)

That's why "decrease in basis" jumps out at me.

Regarding finding a "qualified professional", are there any in any industry these days? Your banker? Your investment advisor? Your BK attorney? Your tax accountant? IRS employees?

I specifically paid a long-time tax accountant to answer the "simple" question as to whether or not the Homeowner's Tax Credit is a once-in-a-lifetime credit or can be used two or three times over a decade. In his office, he accepted a phone call from another person he had paid to research that question!

Based on Paragraph 329 of the Bankruptcy Code and Fed. R. Bankr. P. 2017, the two bankruptcy *judges* (one initiated the action, but was sick, so the other one made the decision) made my BK attorney pay me back 100% of the legal fees he had charged me because *they* believe he violated local attorney standards!

Yet, my attorney's ad stated that he had covered 23,000 bankruptcies (definitely not a young attorney!)

On the way out of the courtroom, 3 different debtors gave me "high fives"!

[justbroke]

Wow. I applaud you for even attempting to read and make sense of the Tax Code. I don't have to tell you that it is still so subject to interpretation and who your tax professional is.

The reason I kept stating to seek professional help (okay, no pun intended ), is because of all the new homeowner forgiveness acts and other things Congress has put in place, has certainly muddied the water. I still *think* you have no issue with your personal residence.

My understanding of determining gain or loss upon sale of any property is the sales price minus the *basis*.

On a 1099-A/C, the "basis" is what the balance on your mortgage was. So it's not your "normal" basis that you would assume was your purchase price (less any allowable fees,etc).

The problem is that darned investment property. Yes, whenever I see the word "basis" I think... "how is basis defined in THAT particular case"? Gotta love the IRM.

While your case can't be unique, I too now wonder why there isn't more guidance in this area, given the vast number of investment properties now being foreclosed upon and 1099-A/Cs being issued left and right.

Would love to hear more about how this goes for you. I do have an investment property that I included in my Bankruptcy. They haven't sold it yet, so I don't have a 1099-A/C and haven't filed anything yet on the recapture or any gain/loss I do realize.

I think you have stumped the collective "us". (Unless someone else chimes in.)

[Funk4Crunk]

Get IRS advice *before* discharging rental property mortgages in BK

Thanks for the quick reply.

The only interpretation that matters is that of the IRS auditor

I agree that there should be *much* more public information about the IRS ramifications related to BK actions, foreclosures, etc. for *rental properties*.

I agree the issue is my rental property, but that could easily be $150K taxable income (some long-term gain) with no proceeds from the deed transfer and no other source of funds to pay those taxes! And how many other people are in my position? Look at the delayed ripple effect-

The huge issue for me is whether BK attorneys may not be counseling their clients on the possibly severe ramifications of discharging rental property mortgages in the BK.

Will the fact that I already did discharge my rental property mortgage in my BK7 possibly cost me (tens of) thousands of dollars in *extra* future taxes upon deed transfer??

If so, could my BK7 attorney be held liable for the failure to even recommend getting tax advice?

I will definitely post back if/when anything happens. Will you please do so, as well?

My inclination is to not file the paperwork, get audited (maybe??), and see what IRS says. I won't be able to pay the taxes, anyway, so why self-incriminate?

If Treasury candidates and many other elected officials haven't paid their IRS taxes, why should I

[justbroke]

I will post when they finally foreclose on my investment (rental) property. They did just send me a new Notice of Default (NOD), saying to pay $30K by 7/3/2009 or the note would be accelerated. Around that time in July, I would have been waiting 18 months for them to actually foreclose -- although the Bankruptcy was filed just about 1 year ago from today.

At the current rate they're going... I think it will be sold or bank owned... in about 6-9 more months. (If I could be so lucky.)

[Funk4Crunk]

Banks *not* foreclosing

I will post when they finally foreclose on my investment (rental) property. They did just send me a new Notice of Default (NOD), saying to pay $30K by 7/3/2009 or the note would be accelerated. Around that time in July, I would have been waiting 18 months for them to actually foreclose -- although the Bankruptcy was filed just about 1 year ago from today.

At the current rate they're going... I think it will be sold or bank owned... in about 6-9 more months. (If I could be so lucky.)

Wow, yet another situation where banks are *not* filing the Lis Pendens/court action to initiate the actual foreclosure. (Given the backlog that could take many more months to even get into court-)

The "hiding" of properties that are not being foreclosed may well prove to be the "story of the year".

Is that the real reason why the major banks are insolvent? Because so many of their properties are no longer bringing in mortgage interest revenues *at all*?

Catch-22: If they sell the property as a short sale or at a sheriff's auction, they have to recognize a one-time, large *loss* in addition to the loss of those monthly interest revenues-

I've also read that some offers are being made by banks to the owners for as much as $3000 if the exiting owner leaves the property in "move-in" condition (vs. destroying it as some irate owners have also been doing).

I have already submitted a predatory mortgage/possible fraud report (without documentation so far) to my state's Attorney General, as an extension of the prior 2007 settlement with Ameriquest Mortgage for predatory mortgage practices.

The settlement required a waiver of any lawsuits *unless* the property was already in foreclosure or went into foreclosure *in future*.

Is it time for another class action lawsuit related to the foreclosures?

Or how about a class action lawsuit (or new Congressional law?) requiring a deed transfer within a specified amount of time for *rental* properties (as totally different from homes), *unless both parties mutually agree to a longer period*?

You saw this issue raised here first

[gowiththeflo]

OMG! YOu two are scaring the bejesus out of me! I just started the BK7 process. the only thng I have with equity in it is a rental property. The bankruptcy atty told me to list it even thought I want to keep it and can easily get caught up with the one month behind payment. He said the trustee is likely to sell it. There is absolutely no market for it... nothing is selling there. Can I keep paying the mortgage and keep the tenants in it until this whole thing is resolved? Should I not list the mortgage company as a creditor? can I do that?

[gowiththeflo]

OMG! Should I list my rental property?

I have a rental property that has equity of about $40,000. I want to keep it but the atty said the trustee will want to sell it and get the funds. There is no market for it... nothing is selling where it is. Can I keep paying the mortgage and keep the tenants in it until it is clear what will happen? I just started the BK7 process... can I undo naming them as a creditor? I also don't want to get caught up in this IRS issue youre trying to figure out.

[justbroke]

If there is really that much equity in it, the Trustee will want that equity! You would have to pay the Trustee for it, or the Trustee will sell that part of your Bankruptcy Estate. The Trustee doesn't care that there is no market. They can sit on it for a year or two. They can even sell it for less so that only $30K comes back or even $20K comes back from it. Trustees make their money -- for the most part -- on selling stuff.

[gowiththeflo]

so can i keep the tenants unaware and keep paying the mortgage until he sells it? or keep the tenants paying and not pay the mortgage?

[justbroke]

so can i keep the tenants unaware and keep paying the mortgage until he sells it? or keep the tenants paying and not pay the mortgage?

Well, if you file, then the rents become property of the Estate.

The core issue is that once you file for Bankruptcy, that property is moved into your Bankruptcy Estate and the Trustee controls that estate until closing (in a Chapter 7), or confirmation (in a Chapter 13 if the plan calls for the property to revert back to the debtor upon confirmation).

[gowiththeflo]

have I filed? the notice to creditors went out last week?

[Scooter10]

Wow. I applaud you for even attempting to read and make sense of the Tax Code. I don't have to tell you that it is still so subject to interpretation and who your tax professional is.

The reason I kept stating to seek professional help (okay, no pun intended ), is because of all the new homeowner forgiveness acts and other things Congress has put in place, has certainly muddied the water. I still *think* you have no issue with your personal residence.

On a 1099-A/C, the "basis" is what the balance on your mortgage was. So it's not your "normal" basis that you would assume was your purchase price (less any allowable fees,etc).

The problem is that darned investment property. Yes, whenever I see the word "basis" I think... "how is basis defined in THAT particular case"? Gotta love the IRM.

While your case can't be unique, I too now wonder why there isn't more guidance in this area, given the vast number of investment properties now being foreclosed upon and 1099-A/Cs being issued left and right.

Would love to hear more about how this goes for you. I do have an investment property that I included in my Bankruptcy. They haven't sold it yet, so I don't have a 1099-A/C and haven't filed anything yet on the recapture or any gain/loss I do realize.

I think you have stumped the collective "us". (Unless someone else chimes in.)

I had one investment forclosed and 1099 c issued in 2008. i was taxed on the captital gain although i included it in my bk7. i had carryover tax losses that he offset it with, but this was only 20K. I did not use the 982 on this.

I have another invesment that forelcosed in 2009 that the accounting says it is going to be about a 100K differnce (30k taxes), i will have to do 982 at this time and go for insolvency.

Another promblem your going to run into is when they issue the 1099. I had one investment issued in 2008, I will have one investment in 2009 (i am assuming they will do this in 09'), and my primary will probable be in 2010. This is alot to plan for.

We may also dispute the 1099c if there are major tax conseqeunces in 2009 There is a good argument about the value of the home. The lender uses the tax appraiser, but we know how properties values are going. If it went to auction and was bought back by the lender for $100, then how can you claim the value is $250,000.

I thought it was a done deal in regards to taxes on foreclosed home through bk, but that does not seem to be the case if you pull money from the investment proprety or have excessive depreviations.

[Scooter10]

[QUOTE=justbroke;290808]I am in no way a tax expert, attorney or CPA. These are my opinions only, so take them for what they are worth.

If you do get one of these, and it was included in bankruptcy (IIB), you just complete IRS Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).

See above. If you are issues a 1099-A/C, then you just complete IRS Form 982. (More than likely, when completed Form 982, you'll check Box 1a. Discharge of indebtedness in a title 11 case)

JustBroke - How can you check box 1a if you in a 13 or 7? Wouldn't you have to use one of the other options?