1099-A

[Chowdahead]

I already filed client's return a few weeks ago. Yesterday the client brings me a 1099-A sent to her from the bank.

Box 2 "Balance of principal outstanding" indicates an amount of $280,000.00.

Box 4 "Fair market value of property" indicates a value of $115,000.00

Box 5 "Was borrower personally liable for repayment of the debt?" is checked NO.

The property was a non-owner occupied 3 unit rental property, which was foreclosed on. Does this mean that this client needs to report $165,000.00 in income on an amended return? :blink:

[kcjenkins]

Until he gets a 1099-C I would do nothing. Then, it will be an issue in the 2011 return. The numbers may be significantly different when he gets the C.

[jainen]

>>Until he gets a 1099-C<<

He won't get a 1099-C because it was a non-recourse loan. He isn't liable for anything more than the entire property, so there is no cancellation of debt. Amend the return to report the sale of business property for $280,000 in the ordinary way.

[kcjenkins]

Good catch Jainen, I read the original post too fast, and just focused on it being an A not a C. I should know better, but this season is getting to me!

[BulldogTom]

I am with Jainen on this one. That is a disposition of a property used for rental activity. Depending on the taxpayer's basis in the property, which chowderhead should have if the taxpayer has been his client for more than this year, there could actually be a loss on the disposition triggering a refund.

Tom

Lodi, CA

[rfassett]

Just to clarify, the stated fair market value means nothing here. As Jainen said, it would be a $280,000 sale in the ordinary sense. Gain or loss will be $280,000 minus your client's basis.

[Pacun]

I am with Jainen on this one. That is a disposition of a property used for rental activity. Depending on the taxpayer's basis in the property, which chowderhead should have if the taxpayer has been his client for more than this year, there could actually be a loss on the disposition triggering a refund.

Tom

Lodi, CA

I think it will be recapture of depreciation which is ordinary income and taxpaper might owe more. I doubt it will be beneficial to the taxpaper but it needs to be amended.

What Jainin and KC said brings a very interesting point... Why do we have to wait for a 1099-C when a reportable and maybe taxable event occurs when a 1099-A is issued?

[BulldogTom]

I think it will be recapture of depreciation which is ordinary income and taxpaper might owe more. I doubt it will be beneficial to the taxpaper but it needs to be amended.

What Jainin and KC said brings a very interesting point... Why do we have to wait for a 1099-C when a reportable and maybe taxable event occurs when a 1099-A is issued?

What if the property was bought in the high point in the housing market for 400K with a loan of 320K. 100K allocated to land and 300K allocated to the building. 5 years of depreciation is approx. 40K. Basis is 360k, sales price is 280K (balance of loan due), leaving a loss of 80K.

I can make assumptions as well. We don't have the basis information, so we don't know if it will be a gain or a loss, but there will most likely be some kind of gain or loss on the disposition.

Jainen did not say to wait, he said to dispose of the property like any other disposition. KC admited she did not take into account the rental aspect of the propery. If it was a personal residence, wait for the 1099C.

Tom

Lodi, CA

[jainen]

>>wait for the 1099C<<

We know from the 1099-A (as reported in original post) that it was a non-recourse loan. Therefore the use of the property is not relevant to whether there was COD income. Non-recourse means the debt was settled in FULL by surrendering the property.

Of course, it might not really have been a non-recourse loan. Sometimes banks get that box wrong. And sometimes a bank will send a 1099-C anyway, apparently just to make trouble for the deadbeat borrower (or maybe because stupid, I mean, untrained people work there). Luckily our clients have us smart folks to straighten it all out.

[Pacun]

What if the property was bought in the high point in the housing market for 400K with a loan of 320K. 100K allocated to land and 300K allocated to the building. 5 years of depreciation is approx. 40K. Basis is 360k, sales price is 280K (balance of loan due), leaving a loss of 80K.

I can make assumptions as well. We don't have the basis information, so we don't know if it will be a gain or a loss, but there will most likely be some kind of gain or loss on the disposition.

Jainen did not say to wait, he said to dispose of the property like any other disposition. KC admited she did not take into account the rental aspect of the propery. If it was a personal residence, wait for the 1099C.

Tom

Lodi, CA

I will doubt that a property purchased for $400K will go down to $115K FMV.

I said "What Jainin and KC said brings a very interesting point... Why do we have to wait for a 1099-C when a reportable and maybe taxable event occurs when a 1099-A is issued?", in responses to other posts that we are suggesting to wait for the 1099-C when a 1099-A is issued. My point is that when you receive a 1099-A, a reportable and maybe taxable event has occurred and needs reporting.

In other words, since the "recourse" box was checked NO, everybody agrees that he needs to amend. I think he would need to amend even if that box was checked YES. I am saying that a reportable and maybe taxable disposition of an asset has occurred when a 1099-A is received.

[BulldogTom]

I will doubt that a property purchased for $400K will go down to $115K FMV.

In other words, since the "recourse" box was checked NO, everybody agrees that he needs to amend. I think he would need to amend even if that box was check YES. I am saying that a reportable and maybe taxable disposition of an asset has occurred when a 1099-A is received.

On the first sentence, I can attest that a property can drop that much in value. Thank goodness it came back some, but I am so underwater in my house I will never be able to move. I bought in 2005 and my home was worth 35% of what I paid for it 18 months ago. And remember, the FMV that the bank is reporting is a made up number. They did not do a full blown appraisal. They guessed at what it was worth in a fire sale.

Your second point. Because the property was taken, regardless of recourse or non-recourse, there was a disposition of an asset used in the production of income. That is reportable. The only question remains is if there is any cancelled debt. If the form is correctly filled out, then no. If there is recourse debt, then they might get a 1099C later and have to look for a code section to exclude the COD income.

Tom

Lodi, CA

[Chowdahead]

Thanks for the input. I finally got to this. Basis was $405,000. Which means client actually had a $125,000 loss on the form 4797

[Chowdahead]

Thanks for the input. I finally got to this. Basis was $405,000. Which means client actually had a $125,000 loss on the form 4797.

[Maribeth]

I will doubt that a property purchased for $400K will go down to $115K FMV.

I said "What Jainin and KC said brings a very interesting point... Why do we have to wait for a 1099-C when a reportable and maybe taxable event occurs when a 1099-A is issued?", in responses to other posts that we are suggesting to wait for the 1099-C when a 1099-A is issued. My point is that when you receive a 1099-A, a reportable and maybe taxable event has occurred and needs reporting.

In other words, since the "recourse" box was checked NO, everybody agrees that he needs to amend. I think he would need to amend even if that box was checked YES. I am saying that a reportable and maybe taxable disposition of an asset has occurred when a 1099-A is received.

You are right. A transaction has occured with the issuance of the 1099-A and another transaction may occur with the issuance of a 1099-C.

Two different things are going on: the foreclosure on the property and the cancellantion of debt.

And as an aside -- NON-OWNER OCCUPIED property with a NON-RECOURSE debt? Boy, I didn' think they made those anymore. I would almost bet money that the 1099-A is recorded incorrectly.

Maribeth

[Chowdahead]

Client also has accumulated depreciation of $50,929. Where do I insert this for the recapture? I have looked all over the 4797 and the Asset Tab and the Schedule E. And I can't find it. Any ideas?

[Pacun]

Client also has accumulated depreciation of $50,929. Where do I insert this for the recapture? I have looked all over the 4797 and the Asset Tab and the Schedule E. And I can't find it. Any ideas?

Go to the asset entry and click on "dispositions", select sale/abandonment and enter the sale information. Add land to the cost and selling costs.

Schedule D will be filled out. See page 2 of Sch D and line 19 will have your answer. Computer will devide the gain between regular long gain and ordinary income and it will calculate taxes on the background. Do not expect to see the recapture depreciation added to line 7. Remember that recapture will only appear if gain happened.