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With your permissino I would like to tranfer your question to our law department.
Your question is not really tax related.
The issue it seems you have is really: is there anything in California law that mutates non-recourse debt to recourse debt, when it is converted to rental use rather than personal use. (there is nothing to this effect in the mortgage documents)
Lets make this easy.
If you are not satisfied let me know.
By law in California this is a non-recouse debt. Confirmed by California Civil code 580b
This is true even if say, you had a four unit building and rented out the other three, and lived in one unit.
It is true because according to the language in the code, as long as you lived in it any part of the time as a primary residence,then by that code, it does not mutate to recourse debt.
Loans get sold between investors and mortgage companies, and I do not know if the lender in question was the original or is a resident or alien (other state) mortgage company.
but despite that, you are correct that this should not attract cancellation debt income.
The lender may issue the 1099 anyway. I can not address why they checked certain blocks, except to say that these are automated systems and so are batched. You may simply be the victim of a batch; and they may not correct the 1099.
What you do is file a paper return, and on the 1099C, write a not that this is a California non-recourse loan. Include in your note that the institution refuses to provide a corrected 1099-C.
The same thing is true of the 1099-A.
Box 5 indicating if you ar responsible for the debt refers to:
Enter an "X" in the applicable box to indicate whether the borrower was personally liable for repayment of the debt at the time the debt was created or, if modified, at the time of the last modification.
Who ever at the bank is reading the instructions may be confused. When you read that language of the instructins it makes it sound like you ar responsible if you had a loan.
But the actual meaning has to do with being a recourse debt.
You can contact the IRS about this, and let them know the lender refuses to modify the loan. California is really an exception and many non-california lenders are unaware of the issues there. If this is a california resident lender I can not say why they are not aware.
For nonrecourse loans there would not be any cancellation of debt income and the property is treated as being sold for the balance of the mortgage.
so you should not have received a 1099-C except that the company may have been trying to comply with the requirement to provide the 1099-C even if you are not lible for the debt.
the solution is to get amended 1099-A and C. However if they will not do it, then contact the IRS for assitance. The IRS can help to get corrected 1099's. You may be instructed to file and to submti the 1099's along with a note explaining the discrepancies.
Let me know if this meets your needs or if you have further questions.
I checked the California Case law, and all I could find related to this, in the tax court involved refinancing.
So for example, a person was forced to refinance as part of a divorced settlement; the court held that the refi was a non-recourse.
The other was where a person had violated the terms of the mortage, so the finance company forclosed, forcing the person to refi the loan.
You can search tax court case decisions at this link: http://www.ustaxcourt.gov/
You are welcome.
Best of luck with this.