COD Income in California

[taxdan]

Client will short sale their principal residence in CA and will probably receive a 1099C for 2013. They are not insolvent or filing for bankruptcy. Even though the Mortgage Forgiveness Act expired for 2013, am I correct that the forgiveness will not be taxable since the mortgage loan was a non-recourse loan as most are in California? Thanks for the input!

Dan

[BulldogTom]

Non-recourse loans will not generate COD income. However, make certain that they have not refinanced, because, generally, only initial purchase contracts are non-recourse.

Tom

Hollister, CA

[jainen]

>><<the Mortgage Forgiveness Act expired for 2013<<

Well, first of all, that was extended to 12/31/13, so it still applies if the California mortgage was refinanced or was otherwise a recourse loan. (Remember that the amount excluded reduces the basis of the property, so there could still be capital gain even though property values dropped.)

It never applied to a non-recourse loan, such as the original purchase mortgage. There can't be any C.O.D. income to exclude because the loan is satisfied in full by the foreclosure (or short sale the lender agrees to). So capital gain is calculated from the mortgage balance, regardless of the actual sale price.

In either case the mortgage balance does not include accrued interest for homeowners who decided to stop making payments . If the lender bothers to put that on a 1099-C, it can't be excluded under Mortgage Forgiveness or Section 121.

[taxdan]

Tom, thanks for the reminder on the refi vs original purchase. I thought of that after I typed my question out.

Jainen, thanks for the correction on when it expires. I knew that and was just thinking ahead to 2014 since that is when this may all happen for the client, not 2013 like I typed. That's also a good point about unpaid accrued interest showing up on a 1099C if the lender chooses to do so and about the possible capital gains. I'm not worried about capital gains in this instance though.

I guess I just assumed the client would receive a 1099C even if the mortgage was the from the original purchase and not a refi. If that were to happen, I suppose I could just correct it on the tax return.

Thanks again for the responses. I do appreciate it!