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Purchased a primary residence in 2008 and ran into financial trouble which resulted in filing a CH7 BK and received discharge in 2013. Subsequently purchased a new primary residence and converted the previous home to a rental, which was then lost to foreclosure in December 2018. I am trying to figure out how to report the "sale" on our 2018 tax return and whether or not it is considered a gain or a loss. As I understand it, normally a foreclosure is treated as a forgiven debt and remaining balance at the time of the foreclosure is treated as income by the IRS. In our case, the mortgage on the property was discharged in 2013 (I have all documentation in the discharge paperwork and bankruptcy schedules) so there was no remaining balance to forgive. I am trying to do this through Turbo Tax.
This honestly may be a situation for a tax attorney to review. A few hundred dollars in consultation and filing help would be very cheap against making a multi-$100k's error.
Purchased a primary residence in 2008 and ran into financial trouble which resulted in filing a CH7 BK and received discharge in 2013. Subsequently purchased a new primary residence and converted the previous home to a rental, which was then lost to foreclosure in December 2018. I am trying to figure out how to report the "sale" on our 2018 tax return and whether or not it is considered a gain or a loss. As I understand it, normally a foreclosure is treated as a forgiven debt and remaining balance at the time of the foreclosure is treated as income by the IRS. In our case, the mortgage on the property was discharged in 2013 (I have all documentation in the discharge paperwork and bankruptcy schedules) so there was no remaining balance to forgive. I am trying to do this through Turbo Tax.
A lot more information is needed to give any kind of reaction to this.
If the debt was discharged in 2013, how did the foreclosure happen in 2018?
Was the debt on the property recourse or nonrecourse debt?
How much was the total debt at the time of foreclosure (including any accrued interest and other amounts due (late fees, collection costs, etc.)) that were deducted as rental expenses?
What was the fair market value of the property at the time of the foreclosure?
How much did you originally pay for the property and what was the tax basis at the time of foreclosure?
Were their other liabilities effectively assumed by the foreclosing party (e.g. property taxes, insurance)?
A lot more information is needed to give any kind of reaction to this.
If the debt was discharged in 2013, how did the foreclosure happen in 2018?
Property had no equity so it wasn't pursued by the BK trustee. Mortgage was not reaffirmed but payments were made until November 2017.
Quote:
Originally Posted by SuiteLiving
Was the debt on the property recourse or nonrecourse debt?
There was no debt at the time of foreclosure as it was wiped out in the BK. No 1099-A or 1099-C was received from the lender after the foreclosure was completed.
Quote:
Originally Posted by SuiteLiving
How much was the total debt at the time of foreclosure (including any accrued interest and other amounts due (late fees, collection costs, etc.)) that were deducted as rental expenses?
Unpaid principal balance at time of foreclosure was $209,958.43
Quote:
Originally Posted by SuiteLiving
What was the fair market value of the property at the time of the foreclosure?
A non-recourse loan is one where the borrower is not personally liable for repayment of the loan. In other words, the loan is satisfied and the lender cannot pursue the borrower for further repayment after it repossesses the property. For non-recourse loans, the figure used as the sales price is the outstanding loan balance immediately before the foreclosure. The IRS says you are effectively selling the house back to the lender for full consideration of the outstanding debt. You will not have any canceled debt income because the lender is prohibited by law from pursuing you for repayment.
Which seems to indicate that the outstanding loan balance would be the fair market value/sale price.
Quote:
Originally Posted by SuiteLiving
How much did you originally pay for the property and what was the tax basis at the time of foreclosure?
Original sale price was $259,000 in 2008. Not sure of the tax basis.
Quote:
Originally Posted by SuiteLiving
Were their other liabilities effectively assumed by the foreclosing party (e.g. property taxes, insurance)?
There was no debt at the time of foreclosure as it was wiped out in the BK. No 1099-A or 1099-C was received from the lender after the foreclosure was completed.
Unpaid principal balance at time of foreclosure was $209,958.43
Chapter 7 Bankruptcy wipes out the debt securing a property, but not the lien. In other words, once a mortgage is wiped out via CH7 the borrower no longer is obligated to repay the debt because it no longer exists. However, the lien survives the bankruptcy and the lender may still repossess the property as recourse for non-payment. On-time payments (in full) were made on the property before, during, and after the bankruptcy filing and discharge, but the mortgage was not re-affirmed (which would reestablish liability for the debt), which is referred to "stay and pay," which basically means, you keep paying, so you can stay, ie: the lender does not initiate foreclosure. After conversion to a rental, however, it became apparent that the property was no longer a good asset, and payments were stopped, so the lender initiated foreclosure.
Quote:
Originally Posted by Quietude
Solving major, complex, potentially catastrophic tax decisions (right on the deadline) with TurboTax and online argument.
Vaya con Dios, compadre.
You do realize it is quite simple to file an extension right? Admittedly, this is fairly last minute and I underestimated the complexity of reporting this event, but if I can't resolve it soon I'll simply file an extension and pay a tax attorney a couple hundred dollars to work it out. Not really sure how this would be categorized as "potentially catastrophic" either? I'm either going get back a couple of thousand dollars or owe them a couple of thousand dollars. Not exactly life changing either way.
You should consult a tax professional (with bankruptcy experience)to confirm everything, but based on the facts given I would say:
The debt sounds like it was made nonrecourse by the bankruptcy. As such, all amounts due on the loan would be considered proceeds from the sale of the property.
I’m assuming the property’s tax basis was greater than the loan balance so there was a loss on the sale. I’d further assume this loss isn’t deductible since the decline in value probably occurred prior to its conversion to a rental. In that event, no reporting would be necessary for that part of the transaction.
The other liabilities that were effectively assumed should be reported as forgiven debt. This would be inclusive as part of the rental income/loss unless you were insolvent at the time.
You should consult a tax professional (with bankruptcy experience)to confirm everything, but based on the facts given I would say:
The debt sounds like it was made nonrecourse by the bankruptcy. As such, all amounts due on the loan would be considered proceeds from the sale of the property.
I’m assuming the property’s tax basis was greater than the loan balance so there was a loss on the sale. I’d further assume this loss isn’t deductible since the decline in value probably occurred prior to its conversion to a rental. In that event, no reporting would be necessary for that part of the transaction.
The other liabilities that were effectively assumed should be reported as forgiven debt. This would be inclusive as part of the rental income/loss unless you were insolvent at the time.
Thanks-I was just making sure that I wasn't missing something simple, but it sounds like the safe bet is to file for an extension and hire a tax attorney.
Thanks-I was just making sure that I wasn't missing something simple, but it sounds like the safe bet is to file for an extension and hire a tax attorney.
Accountant may be a better choice since you’re dealing with the compliance associated with the transaction. Either way, look for someone with bankruptcy experience
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