Received a 1099 for home foreclosure

[becky20]

So we filed ch13 in July 2008 and decided to give up our home in early 2009. We moved out in April, they finally foreclosed in October of this year. We just received a 1099-A and it says the date of acquisition or knowledge of abandonment was 10/29/09, the balance of principal outstanding was 136k, and fair market value of property is 154,500 (they're dreaming, I'm thinking it's more like 100K) - and for "was borrower personally liable for repayment of the debt it says "Yes".

Why did I get this since we are surrendered under the bankruptcy?! Do I do anything with this? Should I send it to our attorney or just file it away? (BTW, nothing was written in box 3 (not sure what was supposed to be in there but it's empty).

Anyone else have this happen?

[JoeBankrupt33]

Happens to everyone who forecloses. For anyone reading, this is a 1099-A. Now, assuming that you've been in your house for at least 2 years, then you will not need to do anything. If you were in the home for less than 2 years, you could potentially owe taxes on the "gain," which is $154,500 - original purchase amount (this calculation changes depending on the "personally liable" box). The reason I say 2 years is that a person can exempt $250,000 (500k if married) worth of gain on a prinicipal residence every 2 years, but there are also some requirements about how long you physically lived in the house.

If you were in the home less than 2 years, then you may need to try to get that fair market value revised so you don't have to pay taxes on it.

[BCA2009]

Joe, you wouldn't have a gain unless the debt has been forgiven. And even if the box indicates that you are not personably responsible for the debt, I wouldn't trust that unless I had it in writing from the Bank.

[stay]

Interesting, just received the same thing and was about to post a new topic. Guess it's tax time for everyone. I was in my house for more than two years. My X did not file for BR and she was on the note. My first thought is I am protected under the BR and she is not. My BR has not been approved yet so that makes me wonder. Is the 1099 to her because she did not file, or both because the BR hasn't been approved, or both because it doesn't matter if I filed and am still responsible for the debt?

[BCA2009]

The 1099A is basically informational. The bank is giving you and the IRS notice that they have foreclosed/taken possession of the property. If her name was the primary on the Note they would send her the 1099A.

We discussed this at depth in http://http://www.bkforum.com/showth...t=51582&page=2

I hope you don't plan on having a good relationship with you ex, because they will go after her if her name is on the note.

[JoeBankrupt33]

Joe, you wouldn't have a gain unless the debt has been forgiven. And even if the box indicates that you are not personably responsible for the debt, I wouldn't trust that unless I had it in writing from the Bank.

Two things can happen in a foreclosure: you can have taxable income from the cancellation of debt, which doesn't apply in a bankruptcy. You can also have ordinary capital gains because the foreclosure is treated as a sale to the IRS and this is not affected by bankruptcy. But, if you've lived in your home for 2 years, you don't pay taxes on any capital gains as long as it's less than 250k (500k married).

[BCA2009]

Two things can happen in a foreclosure: you can have taxable income from the cancellation of debt, which doesn't apply in a bankruptcy. You can also have ordinary capital gains because the foreclosure is treated as a sale to the IRS and this is not affected by bankruptcy. But, if you've lived in your home for 2 years, you don't pay taxes on any capital gains as long as it's less than 250k (500k married).

I agree you could look at it as a sale, but unless the debt is forgiven, you are selling it for ZERO. You have received nothing! Therefore you cannot have a gain. Only a loss. Proceeds ($0) minus Basis (purchase price plus improvemnts) equals a loss. Losses from the sale of personal property are non-deductible. There is no way you can have gain from foreclosure unless the debt is Forgiven/Discharged.

Please explain how you are coming up witha gain situation solely from forclosure.

[JoeBankrupt33]

I agree with you, but the IRS does not. These are excerpts from the IRS:

"3. I lost my home through foreclosure. Are there tax consequences?

There are two possible consequences you must consider:

-Taxable cancellation of debt income.(Note: As stated above, cancellation of debt income is not taxable in the case of non-recourse loans.)
-A reportable gain from the disposition of the home (because foreclosures are treated like sales for tax purposes).(Note: Often some or all of the gain from the sale of a personal residence qualifies for exclusion from income.)

...

Step 2 – Figuring Gain from Foreclosure

4. Enter the fair market value of the property foreclosed.For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure ________
5. Enter your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements.) ____________
6. Subtract line 5 from line 4. If less than zero, enter zero."

Now, when the IRS says "non-recourse," this means that the "personally liable" box is not checked.

I had to pay taxes on a foreclosure!

[becky20]

I had to pay taxes on a foreclosure!

Yes, but was this for a foreclosure during a bankruptcy??

BTW, yes, I have been there for over 2 years.

[BCA2009]

I agree with you, but the IRS does not. These are excerpts from the IRS:

"3. I lost my home through foreclosure. Are there tax consequences?

There are two possible consequences you must consider:

-Taxable cancellation of debt incomenon-recourse loans, enter the amount of the debt immediately prior to the foreclosure ________
5. Enter your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements.) ____________
6. Subtract line 5 from line 4. If less than zero, enter zero."

Now, when the IRS says "non-recourse," this means that the "personally liable" box is not checked.

I had to pay taxes on a foreclosure!

Joe, you and I are on the same page. The key is whether or not your debt has been canceled/discharged/forgiven. It appears in your case that you are in a non-recourse state, therefore your debt was canceled by foreclosure. Most states are "recourse" states. And a number of "non-recourse" states have provisions where the bank can come after you for the debt for various reasons anyway. Like if it wasn't a purchase-money loan. Or depending on whether or not the bank chose judicial or non-judicial foreclosure. I sure there are other exceptions also.

There can be no gain unless the debt has been canceled. Because all of the possible exceptions in non-recourse states, I would not rely on the 1099A alone in assuming that the debt has been discharged even if the "personal liability" box is not checked. Banks make mistakes on 1099's all of the time.

However, if you receive a 1099A and the personal liablity box is not checked it is definitely a good thing. If the debt has in fact been discharged, you can do as Joe did and avoid the income.

There would be nothing wrong with exempting it under the "sale of primary residence exemption" as he did. Although Form 982 specifally addressed this under "qualified residence" rule. The IRS code is large and complex and there many examples of different ways to handle the same type of transactions. The rules that Joe used were enacted in the Taxpayer Relief Act of 1997. Most of the form 982 exemptions were enacted under the Mortgage Forgiveness Debt Relief Act of 2007. But the circumstances that they can be applied to overlap.

The only downside I can see the using the "sale of primary residence" (1997 Law) would be that you could not exempt income form the sale of another primary residence for at least two years. But what are the odds that someone in our situation will be selling a primary residence for a profit less than two years after having our previous home foreclosed.

The IRS keeps the unemployment rate for accountants very low.