Discussion:Debt cancellation investment property 2006

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Discussion Forum Index --> Basic Tax Questions --> Debt cancellation investment property 2006


Discussion Forum Index --> Tax Questions --> Debt cancellation investment property 2006

KoreaNTS (talk|edits) said:

6 January 2009
TP purchased a residential home in 05 hoping to flip it for profit. Property was not rented. Bank foreclosed on property in 2006. Non recourse loan. Am I correct in saying the proceeds is the amount of debt outstanding. Basis what was paid for property plus expenses of maintaining investment such as HOA fees. Debt forgiveness also includes selling expenses in addition to mortgage debt. If this is included in selling price these should then be added to basis as selling expensess which is a wash.

What about the 1099C. Will this not trigger under reporting. Since it is non recourse the 1099C income is not taxable as ordinary income. The TP is insolvent by $500k so a 982 can be filed but it does not seem correct.

KoreaNTS (talk|edits) said:

6 January 2009
One more thing a 4797 is filed in this case.

Riley2 (talk|edits) said:

7 January 2009
KoreaNTS, if the loan is really nonrecourse, then there will be no debt cancellation income and the insolvency exception will not not come into play.

KoreaNTS (talk|edits) said:

7 January 2009
Thank you Riley. I do agree which is the way it is being reported. Only problem is the 1099C which triggers a CP2000.

Riley2 (talk|edits) said:

8 January 2009
Was the debt nonrecourse under statute or contract?

KoreaNTS (talk|edits) said:

17 January 2009
It was non recourse under statute I presume. California mortgage.

Riley2 (talk|edits) said:

17 January 2009
Sounds like it is full-recourse to me. It would be nonrecourse debt if the borrower lived in the home.

KoreaNTS (talk|edits) said:

27 January 2009
OK according to the TP it is non recourse but I do agree, waiting for loan doc's and will probably find so, they did not live in home it was a property to flip.

In the case of full recourse the selling price is then the lesser of FMV or debt outstanding, basis is what was paid plus selling expenses which results in a huge loss and debt forgiveness is picked up as income and 982 is filed to extent of insolvency. That will take care of a CP2000. Is this disposition reported on Schedule D or 4797.

Riley I really appreciate you being here.

CATAXES (talk|edits) said:

27 January 2009
HOA dues not deductible or capitalized for "home". I think "nonrecourse" in CA only applies to principal residence mortgage. Is there a conflict there?

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