Tax Prep by Deb

To determine insolvency all assets have to be taken into consideration. Basically what they are asking you to look at is if you could liquidate ALL assets how much money could you receive? Now look at everything owed at that point and that gives you the picture of whether they were insolvent or not. Keep in mind it is FMV not what they paid for the things. Vehicles go down in value very quickly as do furniture and appliances. They want to know the amount if you sold it just prior to the date of the forgiven debt. I agree, it is difficult to get some of the figures, but depending on how much effort your client (yes, your client) puts into it will determine how much they will have to include as cod income. (I give my client the worksheet, give them the worst case scenerio, and then send them on their way to do their homework). We cannot be expected to go and inventory their homes, banks accounts, investment accounts, ect.... Put some of the work on your client. When I show them how much they will owe if they do nothing, compared to what I think their situation would be if they did their part, my clients leave and come back with the figures I need. Hope this helps a little! Deb!

Exactly. Here in California property values took a huge tumble. I have one client who owes 600,000 on a property that is now only worth 250,000. In this case insolvency could work as she did a loan mod and ended up with a 1099C for about 105,000. It was not her primary residence so were looking for other options, insolvency even if it doesn't reduce it to 0 would help. Deb!

K.C. When you say no exclusions apply are you saying even insolvency wouldn't apply? Deb!

Thanks KC. I was pretty sure that it would be fine, as I couldn't find anything against it. My clients are so excited, and personally hadn't even thought of the credit until I mentioned they may qualify. I'm just waiting for them to close escrow then I will start the process for them. Deb!

I have a slightly different twist. My clients and their mother are purchasing a house outright. There will be no mortgage, but my clients and mom will be on all the paperwork including the deed, property tax bill, hud statement ect... Mom does not qualify for credit, but this is my clients first home purchase. Would they qualify? Deb!

I did speak with my client today, and yes this was their primary residence. Her husband took seriously ill a few years back and is no longer able to work. They are not a young couple but do have several good years ahead. I believe the reason they kept the house was because their daughter wanted it, and was hoping to be able to refinance it in her name, that did not happen so she just continued renting it by paying the mortage. My client realizes they missed the boat in not selling it when they could have. They never expected the market to take such a tragic turn here in California. This daughter no longer lives in the house (they had to evict her) but another child has moved in and so far seems to be able to make the payment. I would love to make this disppear, but with everyones help, and differring views, I really see no way of softening this. My client is currently working up her financial situation as of the cancelled debt, however I'm reasonably sure that if there is any insolvency it will be so very little. My client is thinking in terms of an offer in compromise, but there again I don't hold out much hope. They aren't what you would say wealthy, but they do own some property, and with the exception of the rental in question, has very little debt. Thanks again for all your imput! If you have any other thoughts, I'm all ears! Deb!

I do believe Jainen is correct in his assumption. I am going to contact the client this morning, however my feelings are that this house was originally purchased as my clients main home, then when her husband was disabled the children agreed to move into the home, make the mortgage payment which allowed my client to move into a much smaller home that was more affordable. They realize that they should have just sold the property when they could have, and now I'm thinking they wished they had just let it go as this has caused them so much problems. There is so much to this story that if told would break hearts, that's why I would love to soften the blow, but I am beginning to lean the other way. Even though it has been treated as a rental, I do not believe it was purchased with that in mind. I'll confirm with client and let you know later today. Thanks for all of your imput. I'm really getting to hate these foreclosures, abandoment, and forgiveness of debt situations. Deb!

Just guessing, but it could it be for a second? Most properties sold in California over the past 5-10 years were done so with a fist, second, and in some cases a third mortgage. Is there any account number on the doc and are they the same? Deb!

Thanks K.C. I've been round for round with this one. What do you think however about including it, but having the exception of qualified real property business indebtedness as discussed on Page 5? In your opinion, provided the fmv and other factors that Tom pointed out are met, would this rental property qualify? Deb!

Yes, I did and that is partly why I posted the question. I wanted to make sure I was understanding what I was reading. This is my hoped for response, and it seems logical and reasonable but I'm always a sceptic and do not want anything to come back and haunt me. If it's a legal way to solve this problem I'm all for it. Thanks for the response. Anyone else? Deb!

I have a client who has a rental property. This property has been rented for over 5 years to a family member who is paying the mortgage (it is way above rental FMV in the area). Last year they ran into trouble paying the mortgage and my client went to the mortgage company and was successful in getting the loan modified. Apperantly they didn't read the fine print in all the documents, and needless to say they were issued a 1099-C for around $110,000. The mortgage company lopped off that much from the original loan of over $600,000.00. I know my clients could not prove they were insolvent, but is there any other way to handled this COD income? I was wondering if anyone knows a way of being able to claim an exclusion and then adjusting the basis of the property by the amount of debt forgiven. I have had experience in handling situations where my client lost the home, (not a rental though), but never where they kept the home and was currently using it as a rental. Any thoughts would be greatly appreciated. While my client is not insolvent, the tax debt incurrect from this will be difficult for them to pay. Deb!

I agree totally with what you are saying. So the sale is reported, however there is no COD at this time, that comes when or if the lender agrees to forgive the remainder, or sales the property and forgives the remainder, then you will receive a 1099C and you will handled the COD at that time. Is that correct Jainen? Deb!

I have never been this busy and with so many new referrals this year I am having a hard time keeping up! I think some of it may have to do with the fact that we just had a Liberty Tax service open up on our town, and frankly I think their sign twirllers are scaring business my way! Not complaining, just a little tired! :spaz:

I agree with all that is stated, but will add one more little (embarrassing note). I helped my client fill out the questionaire, however I used the correct year when they asked for dates and as a result his claim was rejected. He brought me the final determination letter and bill, and I swear I must have studied it and my paperwork for hours before I saw what I had done! When I saw the dates I laughed and cried, but called FTB and they were extremely kind and asked me to send a letter of explanation with a corrected questionaire and everything turned out fine! Don't sweat this one, just call and they will walk you through the process. Deb!

I understand your concern, but here is the problem. Let's say you receive a 1099-A and report it based on what's on that form, then the lender sells the property (perhaps after holding unto it for a time) and the price goes up thus reducing the amount of cancelled debt? The whole idea behind the two forms is one simply puts IRS on notice that a change in the property has taken place, thus the need to report the sale, however the actual amount of cancelled debt cannot be determined until the bank or whoever holds the loan actually sells the property. Let's say they report that the balance on the loan at time of the abandonment or foreclosure is 100,000.00 and the FMV of the property is 50,000.00. One would assume under this scenerio that the COD income would be 50,000.000. However lets say the bank holds unto the property and does not immediately forgive the debt, then when they go to sell it lord and behold the value has gone up to 75,000.00. Now you only have 25,000.00 of COD income to report. So again, I think you need to find out if possible if the property has been resold, the lender needs to give something indicating the actual amount of debt forgiven. Here in California we are seeing the banks holding unto the property for at least a year. I had one client who in 2008 declared bankrupcy and had the home included in the charge offs. The bankrupcy was completed in 2008, however in 2009 they received a 1099-C after earlier receiving a 1099-A. So just because your client hasn't received it yet does not mean they won't. If there are any doubts, have your client contact the mortgage holder and ask. Deb!

Don't assume anything. I have seen situations where a 1099-C was issued and not a 1099-A and that is what the instructions you were referring to indicated, however I have not seen a situation where the client was liable for the debt (Recourse Loan) that received only the 1099A. I do believe that until you see the 1099-C you do not include anything in income. Only report the transaction as a sale at this point. Again, I could be wrong, but I've seen a lot of these and the only ones I didn't see a 1099-c on was when the client had a non-recorse loan. Deb!

Please correct me if I'm wrong in what I'm about to say, but I remember reading (don't ask me where) that if a personal residence has been turned into a rental, the personal residence exclussion has to be divided by the time lived in and used as a rental. I don't believe a full exclusion can be taken. And please, Jainen feel free to beat me up on this, but in the back of my mind I believe there was a change starting with 09. Deb!

Thank you all for your comments. The point that kept going through my mind is that for it to be charitable, the giver cannot receive anything in return, such as is the case of a cash contribution. In this situation I believe she is receiving something in exchange. It is not something she would have done on her own had it not been a requirement of her education. Therefore I agree there should not be a deduction. Deb!

This is another one of those situations were an instructor has told her student that because she is not being paid at the place she is doing her internship at, her miles to and from the place could be a charitable mileage donation deduction on her tax return. My client is currently finishing her graduate degree which requires an internship at a hospital. She currently drives about 70 miles to this hospital where she is not being paid for her work but is being credited for her internship. Her instructor told her to keep track of her miles because she could deduct them on her tax return as a charitable contribution. I have researched some, but have not come up with anything that fits this scenerio. I know there are situations that will trigger a charitable deduction for mileage used in your vehicle, but I personally don't see it in this situation. Does anyone know something different? Any help will be greatly appreciated! (I would like to add that my client will go with whatever I tell her, she doesn't want to do anything illegal but if it is a legitimate claim I would like to be able to take it for her.) Deb!

I don't think you will find anything addressing this because it is a fed issue and they are the ones that already deemed it to be unemployment compensation. Deb!

Tom, As I have read it, the Fed's treat the paid family leave exactly the same as unemployment, there is no way to separate it out on the 1099G worksheet so therefore I do believe it is subject to the first 2400 not being taxable. When this first came out I researched the paid family leave being taxable in the first place and it was stated that while normal disability is not taxable the extended was and was to be treated exactly the same as unemployment. So I would say yes! Deb!

Yes the return has to be mailed in. And yes the HUD-1 needs to be attached, however according to the instructions it states that the HUD-1 has to be signed by both parties, seller and buyer. In California I have never seen a signed HUD-1 by either party and when I sent my client to get a copy she was told that it couldn't be produced because of confidentiality clauses. We do have a purchase agreement with both parties signature so I also included a copy of that. I hope IRS will accept it otherwise they are asking for the impossible. Deb!

Catherine, I was just on the myatx web site and they are researching the problem right now. You are not the only one, apperantly many acks have not been posted. Deb!

Jainen, I agree with your statement and do appreciate your input. In this case however neither would be able to show that they support each other more than 50%. While the disabled brother has a few dollars more coming in most of it is used for his own support as he has medical and other issues that are being paid out of his pocket. Brother #2's income goes soley for his own support, so I do not see either paying more than 1/2 of the other person. Deb!

You could very well be right, I will have to check the 06. But he diffently qualifies for 07 - 09. And boy do I have a happy client! Deb!