Refund on New Home Purchase

[catax]

I have a client that purchased a new home a few years ago. It had a lot of specialized wiring and systems in it that never worked. They tried to repair it but for not. They eventually gave him a refund for the faulty equipment. They issued him a 1099 for the refund. The refund was $17,000.

This 1099 seems odd to me. Normally when you purchase something and you recieve a refund for it this is not a taxable event. Do you have any thoughts on this?

[joanmcq]

Seems to me like it would be a reduction in basis.

[jainen]

>>The refund was $17,000<<

Who called it a "refund"? The 1099 suggests that the payer didn't agree to that characterization, especially if the homeowner kept the equipment as well as the 17K. Sometimes such payments don't come from the actual seller, but from an insurance company to settle a nuisance claim.

On another thread in this forum (Tax Fraud Situation), everyone's all worked up that a borrower would report one thing to the IRS and something else to the mortgage company. So, catax, how does your client measure up? Is he willing to back up a claim that the 1099 does not represent income, by informing the lender that the FMV was overstated to the tune of 17K?

[catax]

I think there is a big difference between fraudulent tax returns produced in order to get a mortgage loan and a person that purchases something they expect to work that doesn't. I think my client would have been very happy to have what he originally purchase to work properly. I do understand your point I suppose he could have paid down his mortgage. Who knows maybe his original down payment exceeded that amount. I would need to ask him.

Anyway, it is just an interesting situation. I had not thought of the insurance or nuisance claim angle on the matter. I am interested in others thoughts on the matter. It just seemed different to me. Nena

[joanmcq]

An insurance payment would not be taxable income either, but a reduction in basis.

[BulldogTom]

What box did they use on the 1099? Surely not box 7?

I see it as a reduction in basis. It would be impractical for the company to rip out all the wiring. So that is why they left it behind. I don't see any reason to take that into income. The IRS may not see it that way.

Enter it on line 21 and zero it out with an offsetting entry. Add an explanation page and spell it out for the IRS. They won't read your explanation but it will be there when you write the letter explaining this 2 years from now.

My 2 cents. I know Jainen will disagree.

Tom

Lodi, CA

[kcjenkins]

I agree with Tom. You should not ignore it, because the IRS will be matching it to the return. But you should zero it back out as it is not taxable income, but a refund of a portion of the purchase price, reducing basis.

[Pacun]

Depending on income and other Sch A deductions, the 2% floor will bother your client. He will have to enter 17K on line 21 and 17K on Sch A (subject to the 2%).

[BulldogTom]

Depending on income and other Sch A deductions, the 2% floor will bother your client. He will have to enter 17K on line 21 and 17K on Sch A (subject to the 2%).

Nope. Put the income on line 21, create a list for line 21, put in a negative amount on line 21 equal to the 1099, add an explanation to the return, and wait for the letter 2 years from now. Poof, the correct tax treatment happens.

Jainen will probably disagree, but from the facts as presented I believe this is the proper way to present this on a tax return.

Tom

Lodi, CA

[Tax Prep by Deb]

I actually I had this come up a few years back. My client took the builder to court (small claims) won judgement and when the amount was refunded they were issued a 1099 coded (yes) 7. I had client send by certified mail a letter indicating the error and that either they get it corrected or the case would go back to court. Builder corrected the 1099 and all was well.

Later on I had an opportunity to work with this builder and it became clear to me that the main problem is that when they paid this out that didn't really know how to classify the payment so therefore the 1099 was issued in error. To make a long story short all was resolved in a couple of weeks.

Just my 2 cents worth!

Deb!

[catax]

THANKS FOR ALL THE FEEDBACK IT REALLY HELPS. NENA

[RoyDaleOne]

You could ask the builder to reissue the 1099 as a zero amount.

Why is this transaction subject to 1099 reporting?

[joanmcq]

That's just it; its not subject to 1099 reporting. The other one I'm seeing is the real estate agent issuing one for a 'rebate' on the commission, which should be a reduction in the sale price, and reduction of commission, not on a 1099.