shortsale implications

"nospam" wrote

Schedule D. If it closed in 2008 it'll get reported the same as any other sale, just with a sale date earlier than the purchase date.

Is it still open?

Is 1099-C cancelled debt? Isn't it supposed to be reported on Line 21 Other Income if personal, and Schedule C if business?

Also, maybe the 1099-C was issued in error, and it may not be taxable (all or part of it) in certain situations. How does the recent law about the IRS forgiveness of mortgage debt work?

If you're talking about real estate--you should look at Form 982 and see if you can reduce the "taxable attributes." If you have taxable income, it goes on Line 21 of the 1040.

wrote

Yup. It is for that. Maybe I got confused on the "shortsale" terminology. Thought he was short-selling stocks, which are reported on a 1099-B.

Can one even shortsale a house?

That's what they're calling it. What they're really doing is selling the house for less than the amount owed on the mortgage, with the lender's consent. Which generally means cancellation of debt.

What doesn't appear to have been discussed in this thread yet is that if the short sale was done because OP was insolvent (debts greater than assets) he may not be required to recognize income as taxable.

Stu

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No it closed on 12-23-08.

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I haven't received a 1099C yes, just expecting it.

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Sorry, I wasn't clear, yes it's a shortsale of a house.

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How would someone notify the IRS of this?

I would like to point out, that every short sale does not generate cancellation of debt (COD) income. Many homeowners have nonrecourse loans. This is a loan that is secured by the real property and the lender's only recourse is to the property, not to your personal assets. As such, there is no COD on a foreclosure or short sale. However, in computing any gain on the sale, one must use the amount of the outstanding loan before the sale and subtract the cost basis to obtain the gain. This is different then when one has a recourse loan. In this instance, you compute the COD and then you compute the gain by subtracting the cost basis from the FMV.

The Mortgage Forgiveness Debt Relief Act, provides the ability to forgive up to a $2M of COD on a personal residence. However, any amount of COD forgiven is used to reduce the cost basis before computing the gain.

Finally, any gain on the sale or disposition of the personal residence can be excluded ($250K or $500K on a joint return) if the owner meets the two year rules of ownership and use and has not already used this tax benefit within two years.

See IRS Pub 4681 for more details.

The cancellation of debt income is not taxable if you are insolvent or in bankruptcy, so don't assume that you will get one. The IRS link in my earlier post explains this and other basics.

You can also google for "1099-C" and you'll find lots of info.

(1) Talk with the issuer to get them to not issue a 1099-C. If they've issued one in error, ask them if they can un-issue it.

If that does not work then

(2a) You may attach a form 8275 to your return to explain your situation (or maybe there is a better form to use), or (2b) Don't attach anything to your return, but prepare a form like

8275 and keep in your records, and when the IRS asks, send them this letter.

I'm not 100% sure about (2a) and (2b), but that's what I would do, though someone might have a better suggestion.

Laws vary by state, in California for example only the original purchase money loan is non-recourse, any re-finance is recourse (unless you negotiate different terms with the lender, but I doubt anyone ever does).

Only on qualified acquisition debt, not equity debt. Essentially it allows you to treat your acquisition debt as if it were a recourse loan, even if it's not.

Not all states conform, unfortunately.

That looks to me like a new pub that didn't exist one year ago... very handy!

-Mark Bole

The issuer will issue regardless, it's not their job to know what goes on the taxpayer's return. It's not the fact of filing an information form by the payer that determines ultimate taxability.

Form 982 will be needed, I don't recommend it as a DIY project.

-Mark Bole

You have to calculate the amount of insolvency, and reduce your tax attributes accordingly going forward. It's not a simple "taxable-or-not" situation. If you're bankrupt, it's different still.

For many, it's not a do-it-yourself project if they want an optimum result.

-Mark Bole

Why not? Seems simple enough. One page, and maybe you only have to check box 1a and/or 1e, and part II and part III might be empty. What am I missing?

I've never heard that term before now. I know that some people are selling their homes for less than they owe, and in some cases for less than their purchase price, but I don't see that it automatically generates COD income. It could be that they just have to write a check at closing for the balance, which is what the news report the last few weeks said was more likely happening. People "paying" to get out of their house.

Much more information is necessary to know what happened and if it has any tax implications.

'The Google' often gives a good hint at current usage. Of course it doesn't imply correctness, not in and of itself, but if a phrase is used often enough and accepted without question, it can take on the new meaning. The first full page of google hits (for 'short sale') refer to real estate short sales.

I've always heard the situation described as being "underwater" or "upsidedown on the mortgage".

Joe

Being under water or upside down just means owing more than the house is worth. If you want to sell when you are under water but don't want to pay the bank the difference between the sale price and the outstanding mortgage balance, then you want a short sale.

This may be more frequent in some states, where some lenders are not allowed to sue for a deficiency balance if they foreclose and then sell for less than the outstanding loan balance, such as California.

Stu