1099 tax amounts
I am sort of confused by the 1099c tax. If the seller is responsible for the diff between the short sale and the FMV, is he taxed on it the exact same way that income is?? In other words, to give my client an idea, without being a tax attorney, would I be right by saying he is responsible for approx $7,000 (just to give him a rough idea- taken from the IRS 1040 book) to the IRS on a $40,000 gain??? How is this a gain if it sold for less??? I am assuming it is a gain because he no longer has to pay it.
But ther is a debt relief. Anyone know how this works ??? My client is scared of the unknown especially if he has to pay $7,000 when he is broke and homeless.
Don't confuse IRS treatment of "gain" and "income". Forgiven debt is considered by the IRS to be income which may or may not be subject to tax.
If your Clients want to better understand the short sale process, and their risk of an exposure to a liability to pay tax, why not order them a copy of A Short Sale Primer?
Short Sale Pro, why don't you use your vast knowledge and give the poster a coherant answer instead of shamelessly promoting your products. Did you ever think that if you can answer certain questions others might be impressed enought to purchase the rest of your vast knowledge. If I knew the answer to someones question in this forum, I certainly would not ask them to pay for it since you obviously did not pay to advertise. I mean no offense in my post to you just makes good marketing sense to answer the persons question with a dazzling response then ask them to buy your product.
"Forgiven debt is considered by the IRS to be income which may or may not be subject to tax."
That's the incomplete answer. It should be followed by, "It depends...."
I've probably answered that very same question several hundred times over the years. That's why I wrote A Short Sale Primer.
So I am assuming on a 1099, this depends whether you claimed bankrupty, or are eligible for things such as the Earned income credit, or you didnt make enough money, or you have lots of deductions (lots) Is this correct?? Is there possibly any more I am not thinking of? Also, thanks for your quick replies. This site is very useful.
In the case of debt forgivness, an IRS form 1099 will be issued by the forgiving lender. To determine if the 1099 income is taxable, the IRS imposes several tests to determine insolvency. In the majority of instances, the 1099 income is a non issue. But, it depends.
Shortsalepro--
I'm no CPA but doesn't the seller get a tax exemption if they have lived in the house for longer than 2 years. The recent short sale I comleted I gave the seller a phone # to a local CPA to verify any questions regarding this. I seriously doubt if she even called the CPA.
Jim
TJ, there is a difference in how the IRS treats cap gains, and ordinary income.
Debt forgivness aren't capital gains.
SSP--
Yeah, that makes sence. Like I said, my CPA skills are lacking.
Thanks---Jim
Code Section 108 is the controlling section for this matter. The taxability will depend upon whether or not the taxpayer is insolvent or bankrupt at the time of the debt forgiveness. In addition, certain tax attributes may be lost. There is more so I would consult a CPA in your area who is knowlegable about these matters.
ok- ready for a headache. I'm not a CPA or an attorney, but I am a registered and bonded tax preparer in my parallel universe. You aren't allowed to sue me if any of this information messes you up in any way. It's your job to review the research. I will list some referrences at the bottom.
Assumptions: Buying a preforeclosure on a property owned by a regular person, not a business, on short sale.
Step 1: Determine if the loan to the bank is non-recourse or recourse type debt. In other words - is this debt secured by the property or not?
Step 2:
If non-recourse
The amount due on the loan <minus>
The adjusted basis of the property
<equals> the capital gain or loss
If recourse
The FMV <minus>
The adjusted basis of the property
<equals> the gain or loss
+
The loan payoff <minus>
The FMV
<equals> Income included on 1040
Step 3: If this person has filed bankruptcy, I wouldn't worry about them, but if they haven't they can still be considered insolvent.
How to figure insolvency:
Total assets owned value <minus>
Total liability
<equals> total insolvency.
If this number is positive, this person is not insolvent. If this number is negative, then they can deduct this amount directly from any supposed income amount.
Step 4: If there was any interest canceled on their loan, it's deducted from the amount the of the debt cancellation.
Step 5: Income is taxed at a normal income rate - depending on which tax bracket they fall in, a capital gain is taxed at a higher rate, but that amount is extremely variable.
Step 6: If they had any other goodies on their tax returns from years before that are carrying over to the current year, those amounts will be cancelled up to the amount that they are getting to exclude for insolvency.
Conclusion: I wouldn't worry too much about all this. Isn't that simple? The IRS has put together a well orchestrated method of getting people to pay taxes on debt cancellation if they are the kind of people that just like to settle debts in order to make financial gain, but technically could have paid off that debt. This tax would rarely and barely be imposed on someone who was totally screwed!
References: IRS pub 17 pgs.89-90 basic
pub 544 pg 5
pub 908 pgs. 21+23