Foreclosure & 1099

[keira]

Hello,

Please help!! My father's home foreclosed on 9/8/09. His BK attorney also recently filed the bankruptcy 3 days AFTER the foreclosure date, on 9/11/09. My father's Tax Advisor advised that the BK attorney dropped the ball and should have filed the BK prior to the foreclosure date to prevent any tax consequences (and receive a 1099 from the IRS). It appears timing was crucial and I'm afraid my father may have to owe taxes. I called the Lender and it appears they issued a 1099-A.

The BK attorney included the home loans in the BK filing, however he is not sure whether to put it in unsecured or secured debt section. Note, my father's creditors meeting is not until mid October 2009.

Questions are:

1. I am assuming since the foreclosed home is no longer in my father's name, would this be considered an unsecured debt in the BK filing? I'd expect the BK attorney to know this, but I'm nervous he may drop the ball again so I wanted to know this information for my reassurance. I did get a 2nd opinion from another BK attorney and he mentioned it doesn't really matter if it's unsecured or secured as long as it's included in the BK filing then he is fine. Is this true?

2. If the home loans were included in the BK filing and the debts are eventually discharged AND he receives a 1099, could he simply fill out IRS form 982 and indicate the debt was forgiven due to bankruptcy and it should not be taxed? Or is there a timing issue since he filed for BK AFTER the foreclosure? Would someone happen to know if he can't use the BK and would have to use the insolvency exclusion instead?

Please advise!! Thanks!

[Flamingo]

Have you searched this forum for what you are looking for? Similar issues have been discussed in the past and you should find tons of information that can help you. Also, you may want your father to consider hiring a tax professional to do his taxes for the year in question to be on the safe side as this could make him more likely to be chosen for an audit.

[keira]

Hi Flamingo...

Yes, I've done EXTENSIVE amount of research on the internet and the forums and I still cannot get a concrete answer. I found similiar posts but all were unanswered. A lot of articles I've read online has indicated that BK needs to be filed prior to the lender issuing the 1099 or prior to the foreclosure. But then I'm getting contradicting information too...that if you foreclose on a home and THEN file for BK - then as long as you claim the debt in the BK filing you should be fine. I'm sooo confused. Someone please shed some light!!

BTW, thanks for the heads up, we are definitely planning to get him a CPA or Tax Professional to do his taxes this year.

[music12]

i don't know the details of the law, but the principle is that you get a fresh start. taxing you on being "forgiven" is inconsistent with that principle. so however it's done with whatever form, i am pretty darn sure you will not be paying any taxes on debt that is discharged in bk, no matter when bk was filed.

[justbroke]

Well, the sale can be voided if the deed wasn't recorded before your father filed! In many cases, the Clerk doesn't record the new deed until days after the foreclosure sale. If you filed BK before the actual deed was recorded, then you can void the deed! (I don't know if that's what you wanted to hear or if you are even interested in pursuing that.)

Don't worry about the 1099. If you filed Bankruptcy, you were considered insolvent, as a matter of law, 90 days prior to filing! Easy to show the IRS that you filed, should you get a 1099!

What happens when you get information on the Internet, it's just people guessing. Now, I've researched this, but still consider where you are reading this... although I must say that this site has a wealth of ACCURATE information!

Filing IRS 982 (Mortgage Debt Forgiveness), is all about insolvency. As I wrote above, it's pretty easy to prove as a matter of law, that you were insolvent if the foreclosure was within 90 days of filing. If you look carefully at the form, you could have this forgiven as part of a Bankruptcy or "to the extent insolvent" (not in a Bankruptcy Case).

I personally don't think you have any issues with this at all since you filed after the foreclosure or after the point you became indebted.

[keira]

JustBroke - Thanks for the info!! You're right, the internet has wealth of information and I'm SO grateful for it since it been so helpful with my father's situation. It honestly feels that the internet has been more helpful and informative then my father's attorney, unfortunately. It's been frustrating dealing with the attorney and tax advisor and they have different opinions or they are not knowledgable enough so it makes the whole situation more confusing than what it really is. Honestly our tax advisor scared me b/c she made it sound my father would owe a lot of taxes if he didn't file before the foreclosure sale date. She did mention he could prove he was insolvent, but may take some work and I was hoping we didn't have to go that route and just indicate he filed BK and call it a day.

Anyhow, what do you exactly mean if the BK is filed before the actual deed was recorded, then you can void the deed! I've requested from the Lender for the Trustee Deed Upon Sale document, however there are so many dates - how can I determine the actual date it was recorded?

Also, to confirm my understanding, if the house foreclosed and the BK is filed within 90 days (in my father's case, it was only a couple days), could we in fact use the bankruptcy exclusion on IRS 982 form (instead of having to prove insolvency).

Please advise. THANKS SOOO MUCH!!

[SleepWellNow]

Along these same lines...I called the IRS this week and, after being transferred 5 times, still could not get an answer. Hoping someone can shed some light...

Purchased an investment property 10 years ago. Refinanced 3 years ago (when values were high) taking out equity. Property was included in our BK and is now in foreclosure. Because t's upside-down in value vs amount owed, the Trustee has no interest in the property. If the property is foreclosed, will we owe capital gains taxes in light of the bankruptcy and discharge of the debt?

[justbroke]

JAnyhow, what do you exactly mean if the BK is filed before the actual deed was recorded, then you can void the deed! I've requested from the Lender for the Trustee Deed Upon Sale document, however there are so many dates - how can I determine the actual date it was recorded?

If you can't figure it out, call the municipal office that handles deeds in your area. This could be the county district court or some "Recorder of Deeds". Ask them what date the new deed was issued.

Also, to confirm my understanding, if the house foreclosed and the BK is filed within 90 days (in my father's case, it was only a couple days), could we in fact use the bankruptcy exclusion on IRS 982 form (instead of having to prove insolvency).

I think you'll just check box 1a (I think it's box 1a, you'll have to check), on form IRS 982 indicating that the "debt" was discharged under Title 11 (Bankruptcy)! The "debt" is not the deficiency balance or 1099 itself. It's the underlying debt from the foreclosure of the home.

[justbroke]

Purchased an investment property 10 years ago. Refinanced 3 years ago (when values were high) taking out equity. Property was included in our BK and is now in foreclosure. Because t's upside-down in value vs amount owed, the Trustee has no interest in the property. If the property is foreclosed, will we owe capital gains taxes in light of the bankruptcy and discharge of the debt?

Yes, you might have one! If you purchased for $200K, then refinanced for $300K... then it sold for $250K at the foreclosure, you'll probably have a gain. That's because your original basis is $200K not $300K.

Now, since it's an investment property, you may have some issues with recapture of the depreciation as well.

Anyhow, I have an investment property that hasn't foreclosed. I will probably realize a $16K+ loss on the property when it finally forecloses. I will be seeking professional tax advice because I did depreciate it, as I used it as a rental property.

I think you should seek professional tax advice and preparation services once this forecloses.

[keira]

Justbroke - Sorry I'm a bit unclear still, however let's say the BK filing is before the new deed was issued, and it voids the deed, what does this do? Or what does this mean?

[SleepWellNow]

Justbroke - Thanks for the response. I think you are right. I just couldn't get an answer from the IRS. We are awaiting our discharge in November. Getting past the BK was our first step. Now we are trying to figure out what to do with our investment properties. We've pretty much decided we have to let our primary residense go. It's upside-down at least $200K. Although we have requested a loan modification, no loan modification in the world can take care of that problem without a principal reduction (which they don't seem to be doing). We are going to downsize and move into one of our rentals. With the capital gains tax issue hanging over our heads, it looks like will need to bring this property current and move into it. Hopefully, in five years, the value will be up enough to sell (we're not too far upside-down now) and we can sell with no capital gains tax due. I hope things work out with your rental. Whew...I'm sure going to be glad when this is all over!

[Calthius]

1

[justbroke]

Justbroke - Sorry I'm a bit unclear still, however let's say the BK filing is before the new deed was issued, and it voids the deed, what does this do? Or what does this mean?

To tell you the truth, if you don't care that it foreclosed, then don't even worry about this. If you were trying to save the property, then it would matter.

Since the Bankruptcy stays any further collection activity, it is well decided (good caselaw) that a deed filed after a BK being filed (even to the minute)... is "voidable". That means that you could void the deed and it would be as if nothing happened!

I just want to reiterate though, that if you really don't care that it foreclosed, then don't worry. Now the Trustee could review it and decide to pursue it... if there was money to be gained from this. Since you were probably underwater (home worth less than the mortgage(s)), the Trustee won't care.

[keira]

Justbroke - So here's an update. I just called the Lender and it appears they did not issue the 1099 yet and they do not issue or report a 1099 until year-end to the IRS. Does that mean that my father filed the BK in time and can just simply use the bankruptcy exclusion on the cancelled debt (taxable income) instead of proving insolvency? Please confirm!!! I know he can prove insolvency but was hoping to bypass this route since I know it will take more work in filling out a insolvency worksheet and getting a CPA. THANKS SO MUCH FOR ALL YOUR HELP!!!

[justbroke]

Justbroke - So here's an update. I just called the Lender and it appears they did not issue the 1099 yet and they do not issue or report a 1099 until year-end to the IRS. Does that mean that my father filed the BK in time and can just simply use the bankruptcy exclusion on the cancelled debt (taxable income) instead of proving insolvency? Please confirm!!! I know he can prove insolvency but was hoping to bypass this route since I know it will take more work in filling out a insolvency worksheet and getting a CPA. THANKS SO MUCH FOR ALL YOUR HELP!!!

I would, personally, just check box 1a on IRS Form 982 and be done with it. I believe that the "debt" (underlying debt) was (or will be) discharged in the Bankruptcy.

Again, I am neither a tax attorney, nor a tax specialist.