Florida Community Association Construction Law Blog

Cancellation of Debt - 1099-C:  Short Sale on Property

 1099 A and 1099C: Do you know what it means? Do you know the impact on the sale of your property?

What do you know about the 1099-C form, and Cancellation  of Debt? Find out at a special seminar set for Wednesday, June 17th from 9 to 11 a.m. at SAR.  The event is presented by the Realtor-Attorney Committee, a joint committee of SAR and the Sarasota County Bar Association.
 
Hear from Jerry Levin, Esquire from Levin Tannenbaum, Renea  Glendinning, CPA from Kerkering Barberio, and other attorneys regarding this important topic.
 
The cost is $10 for SAR members and $20 for non-members. Register online by visiting the  Sarasota Association of Realtors.

Jerry Levin's Presentation on Short Sale - 1099C Cancellation of Debt IRS Implications,  "Kicking the Down-and-Out Taxpayer" - Jerry Levin is a Real Estate Board Certified Lawyer with the Levin Tannenbaum Law Firm

Sarasota Association of Realtors 6-17-09 Seminar

“Kicking the Down-and-Out Taxpayer”

A. Notification to the IRS by Required Person or Entity:
The IRS will cross check this information against the tax return filed by the taxpayer.

a. The obligation to Report is the obligation of the taxpayer; exception or non inclusion of income is the burden of the taxpayer to establish
b. The obligation to Notify is the obligation of the Defined Person or Entity.

B. 1099 Defined: All forms and types of reportable income:

Definition: Employer or Payor notification of income in excess of $600.00 paid to a person or entity.

1099 A: Acquisition or Abandonment of Secured Property in conjunction with a foreclosure
1099 C: Cancellation of Debt
1099 B: Broker and Barter Exchange: (1) barter, (2) change in corporate capital structure,
(3) sale of stocks, bonds, future contracts..
1099 Cap: Transaction involving in excess of one million dollars as part
of the change in capital structure or merger or corporate entities.
1099 Div: Dividends and Distributions
1099 G: Government payments. Unemployment, refunds
1099 H: Health Coverage Tax Credit
1099 OID: Original Issue Discount Interest
1099 Int: Interest from banks…
1099 LTC: Long Term Health Care benefits, Viatical Benefits
1099 Misc: Payments not reportable in other forms, payments to attorneys, payments of rent
income, payments of royalties, payments to informers …
1099 PATR: Taxable distributions from cooperatives:
1099 Q: Payments from qualified education programs
1099 R: Distributions from Pensions, IRA, annuities; Profit sharing plans, insurance contracts.
1099 S: Sale or Exchange of real property, primary residence, lease hold interest, timeshare,
life estate, easements, remainder interest, timber royalties, condemnation award,
land contract
1099 SA: Distributions from HSA, Archer MSA, Medicare Advantage MSA.
C. Basic Concepts:
1. 1099 A and 1099 C can be reported on 1099 C Only
Exception: seeking deficiency judgment
2. 1099 C:
a. auto repossession
b. credit card debt
c. work out modification
d. foreclosure
e. certain student loans
3. Identifiable Event: as defined in Code and a Date of discharge
D. Exclusions or Exceptions to be proven and asserted:
a. insolvency
b. bankruptcy
c. qualified farm indebtedness
d. qualified principal residence
e. qualified disaster indebtedness
f. qualified real property business indebtedness
g. Guarantor
h. non recourse debt
i. cancellation is intended as a gift; has limitations to gifting rules currently
$13,000/per person
E. Primary Residence: Exclusion limitation
a. limitation of canceled debt: Two Million ($2,000,000.00),
One million if married and filing separately
b. the funds canceled must have been used for acquisition, build or substantially
improve the home.
c. a reduction in basis required
d. applies to calendar years 2007-2012

F. Caution and Traps:
a. refinanced funds used to pay credit card debt, auto purchase,
investment in other real property, other debts.
b. refinance exceeds original principal debt and used for non qualified purposes
c. reduction of tax attributes (form 982)
d. reduction of tax basis in qualified principal residence

G. Report Sale: Gain or Loss
a. foreclosure
b. deed in lieu
c. short sale

H. Investment Property:
a. loss from the abandonment of business or investment property is ordinary loss.
b. insolvency exception applies
c. report of gain or loss applies

I. Negotiation Strategies:
a. assignment of debt instrument to independent third party; then apply gifting rules, or non
reporting rules. Be careful of related party rules.
b. modification to non recourse debt
c. reporting of disputed liabilities: release and settlement agreement states that no 1099
shall be issued because this is a settlement of disputed litigation and not a cancellation of debt.
d. cancellation does not occur immediately
e. unpaid deficiency judgment
f. delay cancellation until subsequent reporting year
g. release of co obligor if others remain liable
h. Where the nature and amount of indebtedness are contested in a good faith dispute, and a
compromise settlement is reached, the excess of the stated principal amount of the
claimed debt over the amount for which the liability is settled does not constitute
discharge of indebtedness income. Preslar v. Commissioner T. C. Memo 1996-543 revd.

167 F. 3d 1323(10th Cir. 1999)

Resources:

IRS.Gov
Publication: 4681
Publication: 544
Instructions for 1099
Treasury Regulation 1.6050P-1
T.D. 8654
Form 982
Insolvency Worksheet
Worksheet for foreclosures and repossessions
www. Taxalmanac.org
www. Legalbitstream.com
www.cornell.edu
T.C. Summary Opinion 2006-43, United States Tax Court, Martins v. Commissioner, 2006

Sarasota Association of Realtors 6-17-09 Seminar

Jerry Levin, is Board-Certified in Real Estate Law and will be discussing
the IRS Legal Implications of #1099A and #1099C
“Kicking the Down-and-Out Taxpayer”

A. Notification to the IRS by Required Person or Entity:
The IRS will cross check this information against the tax return filed by the taxpayer.

a. The obligation to Report is the obligation of the taxpayer; exception or non inclusion of income is the burden of the taxpayer to establish
b. The obligation to Notify is the obligation of the Defined Person or Entity.

B. 1099 Defined: All forms and types of reportable income:

Definition: Employer or Payor notification of income in excess of $600.00 paid to a person or entity.

1099 A: Acquisition or Abandonment of Secured Property in conjunction with a foreclosure
1099 C: Cancellation of Debt
1099 B: Broker and Barter Exchange: (1) barter, (2) change in corporate capital structure,
(3) sale of stocks, bonds, future contracts..
1099 Cap: Transaction involving in excess of one million dollars as part
of the change in capital structure or merger or corporate entities.
1099 Div: Dividends and Distributions
1099 G: Government payments. Unemployment, refunds
1099 H: Health Coverage Tax Credit
1099 OID: Original Issue Discount Interest
1099 Int: Interest from banks…
1099 LTC: Long Term Health Care benefits, Viatical Benefits
1099 Misc: Payments not reportable in other forms, payments to attorneys, payments of rent
income, payments of royalties, payments to informers …
1099 PATR: Taxable distributions from cooperatives:
1099 Q: Payments from qualified education programs
1099 R: Distributions from Pensions, IRA, annuities; Profit sharing plans, insurance contracts.
1099 S: Sale or Exchange of real property, primary residence, lease hold interest, timeshare,
life estate, easements, remainder interest, timber royalties, condemnation award,
land contract
1099 SA: Distributions from HSA, Archer MSA, Medicare Advantage MSA.
C. Basic Concepts:
1. 1099 A and 1099 C can be reported on 1099 C Only
Exception: seeking deficiency judgment
2. 1099 C:
a. auto repossession
b. credit card debt
c. work out modification
d. foreclosure
e. certain student loans
3. Identifiable Event: as defined in Code and a Date of discharge
D. Exclusions or Exceptions to be proven and asserted:
a. insolvency
b. bankruptcy
c. qualified farm indebtedness
d. qualified principal residence
e. qualified disaster indebtedness
f. qualified real property business indebtedness
g. Guarantor
h. non recourse debt
i. cancellation is intended as a gift; has limitations to gifting rules currently
$13,000/per person
E. Primary Residence: Exclusion limitation
a. limitation of canceled debt: Two Million ($2,000,000.00),
One million if married and filing separately
b. the funds canceled must have been used for acquisition, build or substantially
improve the home.
c. a reduction in basis required
d. applies to calendar years 2007-2012

F. Caution and Traps:
a. refinanced funds used to pay credit card debt, auto purchase,
investment in other real property, other debts.
b. refinance exceeds original principal debt and used for non qualified purposes
c. reduction of tax attributes (form 982)
d. reduction of tax basis in qualified principal residence

G. Report Sale: Gain or Loss
a. foreclosure
b. deed in lieu
c. short sale

H. Investment Property:
a. loss from the abandonment of business or investment property is ordinary loss.
b. insolvency exception applies
c. report of gain or loss applies

I. Negotiation Strategies:
a. assignment of debt instrument to independent third party; then apply gifting rules, or non
reporting rules. Be careful of related party rules.
b. modification to non recourse debt
c. reporting of disputed liabilities: release and settlement agreement states that no 1099
shall be issued because this is a settlement of disputed litigation and not a cancellation of debt.
d. cancellation does not occur immediately
e. unpaid deficiency judgment
f. delay cancellation until subsequent reporting year
g. release of co obligor if others remain liable
h. Where the nature and amount of indebtedness are contested in a good faith dispute, and a
compromise settlement is reached, the excess of the stated principal amount of the
claimed debt over the amount for which the liability is settled does not constitute
discharge of indebtedness income. Preslar v. Commissioner T. C. Memo 1996-543 revd.

167 F. 3d 1323(10th Cir. 1999)

Questions:

1. I don’t agree with the information on the Form 1099-C:
Answer: Contact the lender for a corrected form and retain your records

2. (a) I did not get a 1099 A or C but I did get foreclosed. Do I have to report the sale and cancellation
of debt?
Answer: Yes, the event of a foreclosure, short sale or deed in lieu is a disposition of real property which must be reported as a sale.

(b) I did not receive a 1099-C but my debt was not repaid and my debt has been discharged. Do
I have to report the cancellation of debt?
Answer: Yes, the non receipt of a Form 1099 does not convert a taxable item into a non taxable item.
T.C. Memo 1992-317 affd; Vaughan v. Commissioner, 15 F.3d 1095 (9th Cir. 1993)

3. Do I have cancellation of debt if I borrow money from a commercial lender and it is not secured by a
mortgage but I pay off the loan at a discount?
Answer: Yes, the relief of the amount of discount is reported as ordinary income. This is no different
then negotiating a reduction for payment of credit card debt. If the loan was non recourse then no cancellation of debt occurs.

4. Can I claim a loss on the sale of my primary residence?
Answer: No, losses from sale of personal property are not deductible.

5. Can I exclude home equity line of credit?
Answer: Yes, if funds specifically used to buy, improve or build your home, otherwise No.

6. Can I exclude debt on my second home?
Answer: No, not under the Mortgage Forgiveness Debt Relief Act of 2008 and 2009. However, try the insolvency exception.

7. How do I know I am insolvent?
Answer: You are insolvent when your total debts exceed the total fair market value of ALL your assets
on the date of the cancellation of debt or foreclosure. (including IRA, 401K)

8. Can I exclude the entire loan amount of the refinance debt of my primary residence?
Answer: No, the refinance amount is limited to the principal amount refinanced originally which is qualified principal residence debt. (buy, build improve). However, if the refinance was used to improve
the property you may be able to exclude these sums.

Resources:

IRS.Gov
Publication: 4681
Publication: 544
Instructions for 1099
Treasury Regulation 1.6050P-1
T.D. 8654
Form 982
Insolvency Worksheet
Worksheet for foreclosures and repossessions
www. Taxalmanac.org
www. Legalbitstream.com
www.cornell.edu
T.C. Summary Opinion 2006-43, United States Tax Court, Martins v. Commissioner, 2006