Owner Doesn't Really Own or Live in House

[Chowdahead]

I have a new client, and he owns a house b.c his brother could not qualify for it. However, the brother is the one that lives it and pays the mortgage and all taxes. Since the brother is the one that does everything, he lists the interests on his income tax return.

The owner of the house has never listed the house as an assets or ever has claimed anything for income tax purposes. He said he was told that as long as only 1 person reports this to the IRS, there is no problem. The owner gets no profit. So now, they want to sell it, so once that happens, the bank will probably issue a 1099 to the owner, it is going to be a short sale so again there is no profit, who does this get reported and by whom?

I recall from my HR Block days and CCE courses that the person who actually pays the mortgage and expenses is the person who can report it on their return.

So how would this factor in if a 1099-A or 1099-S is issued due to the short sale?

[bstaxes]

Does the brother co-own the house? I would go with the ssn that appears on the paper work. If you don't own it how can you sell it? I have a client that splits the interest and mortgage, but both names are on the deed.

[kcjenkins]

So how would this factor in if a 1099-A or 1099-S is issued due to the short sale?

Assuming the brother is an 'equitable owner' his claiming the interest is not a problem. But the sale, and any gain from COD income would go to the brother who is on the deed and the mortgage. I'm assuming that is the same name on both. If he has to pick up income from this, that is the price he will have to pay for doing it this way. Hopefully the other brother will pay him any taxes he picks up, but that is between them, and not a tax issue.

And since this was not the owner's personal residence, no exclusions apply.

[Tax Prep by Deb]

Assuming the brother is an 'equitable owner' his claiming the interest is not a problem. But the sale, and any gain from COD income would go to the brother who is on the deed and the mortgage. I'm assuming that is the same name on both. If he has to pick up income from this, that is the price he will have to pay for doing it this way. Hopefully the other brother will pay him any taxes he picks up, but that is between them, and not a tax issue.

And since this was not the owner's personal residence, no exclusions apply.

K.C.

When you say no exclusions apply are you saying even insolvency wouldn't apply?

Deb!

[kcjenkins]

No, insolvency would. But not the personal residence exclusion. And since his credit was good enough for him to buy his brother a house, I was assuming he was not insolvent. But given today's economy that might not be the case today.

[Tax Prep by Deb]

No, insolvency would. But not the personal residence exclusion. And since his credit was good enough for him to buy his brother a house, I was assuming he was not insolvent. But given today's economy that might not be the case today.

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!