Foreclosure

[Paul Jacome]

I have a client whose property was forclosed upon by the mortgage comjpany, a two family dwelling which was a 50% rental. They also filed for Chapter 7 bankruptcy in 2008. Although they received a 1099A showing the balance of principal outstanding and the fair market value of the property, is there any excape from a tax liability standpoint regarding this possible capital gain situation because of the bankruptcy that occurred.

[imjulier]

I may have a client in the same situation and I don't know the answer to this either. My instinct says debt relief is taxable and it was with a bankruptcy I worked with a few years ago....hopefully others on this board will have comments.

Julie

[ILLMAS]

Isn't there a difference between a foreclosure and a short-sale? I thought that once you foreclosure, the bank takes over the property vs a short-sale, bank allows for you to sell for less, forgiving debt between the amount due and sales price. Then you get a 1099-C, here is where you pay taxes on the amount forgiven unless you are qualify for the Mortgage Relief Act. But it would be a good idea to know what going on, a couple of clients are in that situation of foreclosing.

[jasdlm]

Hi, Paul. I had this situation last year (rental house in foreclosure). I don't know any way around the capital gains tax (I assume you mean coming through on 4797). If you're talking about the debt relief, then you probably have an insolvency argument. (You'd have to run the numbers, but given that you mention a bankruptcy, it seems possible.)

[LindaB]

...is there any excape from a tax liability standpoint regarding this possible capital gain situation because of the bankruptcy that occurred.

No, you still have to report it as a sale, show any gain or loss.

[Lion EA]

Unless it sold inside the bankruptcy estate and was reported there.

[Paul Jacome]

Thanks to everyone for their comments. I've pretty much made a decision that one half of the 1099A amount that my client received will be considered residential forgiveness on Form 982 and the other half the rental portion will be reported on Form 4797. I also can't find where although there is a bankruptcy, the rental portion is forgiven and must be treated accordingly.

[LindaB]

Thanks to everyone for their comments. I've pretty much made a decision that one half of the 1099A amount that my client received will be considered residential forgiveness on Form 982 and the other half the rental portion will be reported on Form 4797. I also can't find where although there is a bankruptcy, the rental portion is forgiven and must be treated accordingly.

There's no COD with a 1099-A so you don't have to use form 982, just show the sale.

[Paul Jacome]

Linda,

That exactly what I've done. I showed the sale for the residence part on Schedule D utilizing the 121 exclusion.

Thanks for your input.