Didn't file 2006 taxes but already filed BK (1099-A question)

[Ihatecredit]

After a very stressful 3 years, I've decided that chapter 7 BK is my only option. I've already started the process and my creditors meeting is on June 3rd. The problem is that I originally thought I didn't have to file taxes for 2006 since I was unemployed, but I found out through the IRS that I received two 1099-A forms (abandonment of secured property) in 2006 when my 2 properties were foreclosed. Apparently, I need to pay taxes on the loan amounts that were forgiven. One of these amounts shouldn't even be there since I believe they were paid off when the house was foreclosed. Should I file ASAP and then include whatever I owe to the IRS in the BK?

Anyone have any experience with this? Thanks for any insight!

[justbroke]

Unfortunately I don't believe (personal opinion) that those taxes qualify for discharge. If that was 2006, then they were due without penalty on April 15, 2007. Since you didn't file the return more than 2 years before filing Bankruptcy and it hasn't been 3 years since the tax was due... then I don't think it's dischargeable.

However, you may be able to get a hardship declaration from the IRS. There are forms that you must complete to basically show that you were insolvent at the time the tax was assessed. This was part of the mortgage debt relief provisions under President Bush in 2007. However, I think it only covers deficiencies (on foreclosures) or primary residences for 2007-2009 only. Since you said "2" properties, the absolute best sunny-day scenario would be that 1 of them is covered under this special forgiveness law. However, the 2nd property wouldn't be covered.

You really really need to be talking to a bankruptcy lawyer and maybe even a tax lawyer. Of course you know that you are required to file all prior tax returns in order to conclude your 341 Meeting and receive a discharge.

Did you file pro se or are you with a lawyer?

[Ihatecredit]

Thank you for your help,

I filed through a lawyer. If anyone is interested and has a similar problem I will state what I know. The house in question was foreclosed and sold in either late 2006 or early 2007. However, after talking with the bank, it seems they do not care how much money they recovered after the property was foreclosed; they report the amount of the original loan.

This of course is unfair to me since the amount in question is over $350,000. I can not pay taxes on the amount that was NOT my income. The house in fact had depreciated a lot due to my bad luck of jumping in right when housing prices were going crazy. I talked to a tax lawyer, and he said that it is should not be able to be included in the BK, but to ask the trustee never-the-less. Also, to contact the bank and see if they could report the correct amount to the IRS.

Justbroke, are you saying that if it was 3 years from when the tax was due, then I can include it in the bankruptcy. Perhaps, my only option in this case would be to cancel the BK and wait another year. (There's just no way that can be paying taxes on this amount for the rest of my life)

[justbroke]

I filed through a lawyer. If anyone is interested and has a similar problem I will state what I know. The house in question was foreclosed and sold in either late 2006 or early 2007. However, after talking with the bank, it seems they do not care how much money they recovered after the property was foreclosed; they report the amount of the original loan.

Yes, they should complete the 1099-A form with Box 2 having the full amount of the principal ($350,000), and Box 4 having the Fair Market Value. If they didn't complete box 4, then the form is probably invalid.

So my question is... what's in Box 2 and what's in Box 4 for each of those 1099-As. Also you keep mentioning 2007. Are those 1099-As for 2006 or 2007?

Justbroke, are you saying that if it was 3 years from when the tax was due, then I can include it in the bankruptcy. Perhaps, my only option in this case would be to cancel the BK and wait another year. (There's just no way that can be paying taxes on this amount for the rest of my life)

I don't think it's that simple and hence I ask that you refer to a BK attorney. Here's why... the law on discharging taxes reads that the tax must have been assessed and due without penalty 3 years prior to filing and it has been 2 years since you filed an actual return. Since you never filed a return... you're still stuck.

[Ihatecredit]

So my question is... what's in Box 2 and what's in Box 4 for each of those 1099-As. Also you keep mentioning 2007. Are those 1099-As for 2006 or 2007?

1st Property: $98,000.00 Principal Outstanding, $106,425.40 Fair Market Value.
2nd Property: $364,400.00 Principal Outstanding, $393,110 Fair Market Value.

The two 1099-A forms are for 2006. My BK attorney doesn't know the answers to these questions and my tax attorney recommends that I file taxes for 2006, and then just try to deal (bargain) with the IRS after the BK is done.

Is there any way that I can include this amount and amend it to the bankruptcy which is about to happen...two years later? Can I cancel the BK, wait two years, then file again hoping to include this amount? I also heard that you can't leave the country if you owe the IRS taxes, is this true? (I need to leave the country for work) I'm also thinking about just filing my taxes for 2006 and NOT including any income since I do not agree with these amounts, after all, the loan companies did get most of their money back.

[justbroke]

Ummm... looks like a gain, not a loss.

If Box 2 (Principal Outstanding) is less than Box 4 (FMV), then you have a capital gain. If one was your primary residence and you resided in it for 2 out of 5 years preceding the sale, then you may be able to claim the one time $250K "exemption" of the gain.

Also, the investment property will hit you since it's a gain. Strange, your tax attorney isn't thinking that you have two gains totaling $37,535. You'd pay taxes (long term gains) on the $37,535 (top rate like 15%). (Remember, I'm just using my brain here and I'm no CPA or tax accountant.)

What did your Tax Accountant think as far as your liability? Did he even mention the $250K capital gains exclusion? Was one of these homes your primary residence (and you lived there for 2 of five years or at least 2 years)???

My rudimentary maths says that if the $364K property was your primary residence of 2 years, then you pay no tax on the $29K capital gain. On the second property, you pay 15% (LT) on $8.425K and that's $1,264.00.

Strange.

[JoeBankrupt33]

Based on the principal balance and the fair market value listed, you should not owe any taxes at all, unless one of the properties was a rental. The only time you can get taxed for a forgiven debt on a mortgage is when the fair market value is less than the principal balance.

If one was a rental, then the house should have been depreciated, and you should have what's called a section 1250 recapture.

[JoeBankrupt33]

I didn't think about what justbroke said - you "realize" a capital gain and the sales price is the fair market value. I was also assuming that you had a 250k exemption.

But, if the second home was a rental, then the sales price is the principal balance, but you still need to be concerned about the depreciation and recapture.

[Ihatecredit]

Wow, it looks like I'm an even bigger idiot than I previously thought.

I acquired both properties late 2005 which means that I obviously could not have resided in any of them for 2 years. Then circumstances went down for me and I lost all of my assets and ability to pay the mortgages, but that's another sob story for another day.

This means that I have a total gain on both properties in the amount of $37,135 and I need to pay taxes of $5,570.25 (15%) on them which is not as bad as $450K!

Final Question: So I just need to file taxes for 2006 and include the amount of $37,125 in box 21 (other income) of the 1040 form, correct?

Justbroke's fortune cookie says: Fortune will indeed smile upon you very soon by the way of friends or family. The selfless help you've provided for others has long been noticed by those above.

[justbroke]

This means that I have a total gain on both properties in the amount of $37,135 and I need to pay taxes of $5,570.25 (15%) on them which is not as bad as $450K!

I don't know if you get to use short term gain or long term gain percentages. That will be based on acquisition date and disposition date. (Long term means 1 year and a day... anything less is short term.)

Final Question: So I just need to file taxes for 2006 and include the amount of $37,125 in box 21 (other income) of the 1040 form, correct?

You need to probably complete several forms. First, were they investment property? Second, did you claim depreciation on those properties?

I would have a tax professional complete your 2006 taxes for you. It may cost $200 to do this, but it is worth it. Unless you're using a tax preparation software program, I wouldn't try to do this on my own. Capital gains on Schedule D, and there are other forms involved if this is indeed investment property and you claims any depreciation.

[JoeBankrupt33]

Under certain circumstances, you can also get a prorated portion of the 250k exemption based on how long you did stay there. These circumstances include health, change in employment (and moving 50 miles), and unforseen circumstances (including death, divorce, unemployment, and others). I recommend reading publication 523.

Also, any gain is based on the sales price minus the purchase price (or adjusted basis).

We are also assuming that this is a recourse loan. In the event of a foreclosure, recourse and non-recourse loans are treated differently.

To second justbroke, you need to seek professional tax help.

[whipster1]

You were insolvent. Ask your local tax attorney. You should owe nothing.

[CH33 Paralegal]

You'll need to speak with a tax attorney. BK does nothing for taxes, except pay them in a 13.