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Home  Articles Foreclosures and the 1099-C
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Foreclosures and the 1099-C |
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I hope your investing is going well. We are seeing a lot more foreclosures in the market and are bound to see even more. Last month I finally worked out a deal with one of my mortgage debtors to pay their loan current and allow a one-time assumption of the loan to help them out. I had plenty of collateral, so it worked out for us both. This week, I am working a couple of foreclosures which brought the following to mind.
IRS TOLD TO BE LENIENT
Foreclosures are treated like sales for tax purposes. If you hold a note that goes into default and have to foreclose, that is considered a sale. Even if you get the property, that is the end of the note investment. You must claim income of the difference in your note balance and the bid price.
That is why you should always begin the bidding at the principal balance or basis of the note and bid up to your full amount owed. That way your profit for tax purposes will be minimized if no one else bids or drops out. This approach has the added advantage of encouraging more bidding on the property and you just may be able to get all that is owed including attorney fees.
This bid amount, once taxes have been paid on the note, becomes your new basis in the property. So, if you turn around and sell it, tax is paid on the difference between this new basis and the net sales figure.
But what about taxpayers losing their homes and receiving 1099-C for the cancellation of debt? This has become and will continue to be a touchy issue.
Several important members of Congress have told IRS to be lenient with taxpayers that owe taxes due to foreclosure on their homes. Where the foreclosed debt exceeds the value of the home, the IRS considers the excess to be income.
Taxpayers in this situation can request that the IRS waive part of the tax owed or to allow payments to be stretched out. Go to
http://www.irs.gov/newsroom/article/0,,id=174034,00.html
to get details about a special income tax exclusion for debtors who are insolvent.
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