My client had his house foreclosed in 2004 after missing only 1 payment. He got a Form 1099A showing principal owed of $50K (his original basis) and an FMV of $220,000. He did not, however, get the difference from the mortgage company. He is single and the house was a qualified principal residence as he had lived there the past 4 years. He sued the mortgage holder and won a summary judgment in 2006, receiving a check for $165,000 (after attorney fees). I am using a Form 8275 with his tax year 2006 return showing his $165,000 to be non- taxable income as it relates to sale of a qualified principal residence in 2004 that had an exclusion of up to $250,000. I have not yet filed either 2004 or 2006 return yet. Is there another way to handle this non-taxable capital gain?
(The NAEA tax research service wants $225 to research this question as they say it is a complex tax issue).
There is something more to this. I wrote and implemented a mortgage foreclosure system for a major mortgage servicing company in 1984-85. Foreclosures take anywhere from three months to forever. Any attorney who could walk and chew gum at the same time could have stopped this.
You changed phrases from "mortgage company" to "mortgage holder". Does this mean that the mortgage was held by an individual?
$165,000 is 2/3rds of $247,500. Presuming the attorney fees were
1/3 plus costs, it would appear the summary judgement was for more than $250,000. Is that correct?
If the NAEA tax research service charges by the hour, this looks like a non-complex tax issue.
I do not prepare tax returns and I wouldn't know a Form 8275 if it offered to buy me a beer. But this appears to be fairly straight forward to me if the facts as stated are correct.
Your client had the sale of a qualified residence in 2004.
He did not have constructive receipt of the funds until 2006.
He has a capital gain equal to the judgement as of the date in 2006 on which he received the funds. The first 0,000 is exempt from taxation
Whether or not your client has a Schedule A deduction for attorney fees plus cost, I will leave open to discussion by others in this newsgroup.
What makes this more interesting to me is that mortgage companies ususally bid only the principal plus interest and costs. It is likely that the summary judgement was the result of the mortgage holder wanting the property.
If the mortgage holder is an individual, I suggest he/she be reported to the IRS to see if they declared their income from the foreclosure in 2004. My brother (who does prepare taxes) says it's bad karma to report people. That is just one of many things on which we disagree.
The mortgage company and mortgage holder were one in the same, a large bank whose first name begins with Chase. My client did not get an attorney until after he was evicted and moved out. The attorney also could not believe he was foreclosed after missing only one paytment. Yes there were attorney fees, probably about 1/3, but I was not told that amount. I am not sure attorney fees are deductible since they were non-business expenses and any loss on sale of a principal residence is non-deductible. Attorney fees for divorces, etc. are not deductible.
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