Rental Property Foreclosure

[IllinoisTaxMan]

The client's rental property fell into the court ordered receivership in September 2006.

I would like to know who is responsible for 2006 tax return, the taxpayer or the receiver.

I reported the rental activity under the taxpayer return for a whole year after I colleced tax data from the receiver under my assumption that all the funds (trust) were treated as owned by the taxpayer.

Now, the taxpayer wants me to amend it since she had no right to use the money/lease/rent collected by the receiver.

I wonder if I have to amend it or not.

Any experienced advice is welcome.

[kcjenkins]

If this was part of a bankruptcy. the income that went to the trustee is not the taxpayers income. You should amend the return. The trustee has the responsibility to do any reporting required of the trust funds.

[IllinoisTaxMan]

If this was part of a bankruptcy. the income that went to the trustee is not the taxpayers income. You should amend the return. The trustee has the responsibility to do any reporting required of the trust funds.

It was not a part of bankruptcy. It was foreclosed but the lender didn't issue 1099-A or 1099C.

The taxpayer could receive the Settlement Statement. It showed that the property was sold on October 2007 and the seller was the lender.

Would you comment on my question again?

[RoyDaleOne]

What are the terms of the receivership?

Was the receiver to give credit to your client for rents collected, or only use the rents for the benefit of your client?

Were the rents applied to the loan on the property.

Your client may or may not have a gain or loss on the sale of the property which may or may not have a tax effect, depending upon your client's tax circumstances.

[IllinoisTaxMan]

What are the terms of the receivership?

Was the receiver to give credit to your client for rents collected, or only use the rents for the benefit of your client?

Were the rents applied to the loan on the property.

Your client may or may not have a gain or loss on the sale of the property which may or may not have a tax effect, depending upon your client's tax circumstances.

The lender sued the taxpayer for not payments of mortgages. The court ordered the receivership.

The receiver just received the management fee approved by the court.

The rents collected by the receiver was applied to interest, principles, property taxes and other operating expenses.

The client couldn't even touch any money since the court didn't allow her to do it.

[jainen]

>>she had no right to use the money/lease/rent<<

She had every right to that money. That's why it was available for the court to use it for her own debts. It was all taxable income to her until title was transferred away from her, which apparently didn't happen until the sale. I wouldn't waste any time second-guessing the settlement statement. All in all, it sounds to me like she came through this foreclosure in remarkably good shape.

[kcjenkins]

The lender sued the taxpayer for not payments of mortgages. The court ordered the receivership.

The receiver just received the management fee approved by the court.

The rents collected by the receiver was applied to interest, principles, property taxes and other operating expenses.

The client couldn't even touch any money since the court didn't allow her to do it.

Given those facts, it was her income, she got the benefit of the income, since it was applied to her debts. So it is taxable to her, the depreciation, interest and other expenses are deductible and you do need to amend the return to properly report these things.

[IllinoisTaxMan]

>>she had no right to use the money/lease/rent<<

She had every right to that money. That's why it was available for the court to use it for her own debts. It was all taxable income to her until title was transferred away from her, which apparently didn't happen until the sale. I wouldn't waste any time second-guessing the settlement statement. All in all, it sounds to me like she came through this foreclosure in remarkably good shape.

Ok, But, the problem is that the taxpayer didn't receive any information from the lender such as the date of the foreclosure, debt cancellation, the mortgage interest payment which occurred in 2007.

I wonder how I can prepare 2007 return on these matters.

[RoyDaleOne]

1. There may not have been any debt forgiveness.

2. Has the client ask for the interest, fees, expenses, etc. from the receiver.?

[jainen]

>>the taxpayer didn't receive any information from the lender<<

Just in case he forgot, you might remind him about the receiver.

[IllinoisTaxMan]

1. There may not have been any debt forgiveness.

2. Has the client ask for the interest, fees, expenses, etc. from the receiver.?

I am asking the taxpayer to request P/L from the receiver.

I have one more question. How do I calculate the capital gain on this foreclosed property?

[kcjenkins]

Just like any other business property that was sold.

[RoyDaleOne]

Do you know if an Section 108 exception applies?

[IllinoisTaxMan]

Do you know if an Section 108 exception applies?

This is what I wonder about.

In case of residence, due to Section 1082, the discharged debt is not income to the taxpayer.

Does this real property apply to Section 108? The taxpayer has 1031 deferred gain. So, if the rule applies, it will save her lot of taxes.