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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
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Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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Hi, for a California non-recourse foreclosure, a person should

Customer Question

Hi, for a California non-recourse foreclosure, a person should only receive a 1099-A with box 5 checked as No (Not personally liable for the debt), and a 1099-C should not be issued as there is no cancellation of debt, right?

A lot of national banks seem to be issuing both a 1099-A with Box 5 as Yes, and a 1099-C - seeming as a matter of policy, ignoring any state laws. What would we do with regards XXXXX XXXXX taxes? Technically we should not have to file the COD as income because a 1099-C should never have been issued in the first place. The 982 form does not have a check box for exclusion of the COD due to the non-recourse nature of the loan. Home technically does not qualify under the Mortgage Debt Relief Act because owner moved out and lived somewhere else before it foreclosed.

Home in question was bought with purchase-money loan, never refinanced, and owner occupied for 2 years. Owner moved away for a job, couldn't sell the home, and then rented it out for less than 3 years. No bankrupcy, not insolvent. As it was created as a non-recourse mortgage, it should still remain non-recourse, and no cancellation of debt incurred as a result of foreclosure, correct?
Submitted: 5 years ago.
Category: Tax
Expert:  Arthur Rubin replied 5 years ago.
Dear "Solaris",

Thank you for using Just Answers.

The instructions for forms 1099-A and 1099-C specify:

If, in the same calendar year, you cancel a debt in connection with a foreclosure or abandonment of secured property, it is not necessary to file both Form 1099-A and Form 1099-C, Cancellation of Debt, for the same debtor. You may file Form 1099-C only. You will meet your Form 1099-A filing requirement for the debtor by completing boxes 5 and 7 on Form 1099-C. However, if you file both Forms 1099-A and 1099-C, do not complete boxes 5 and 7 on Form 1099-C. See the instructions for Form 1099-C on page 2.

As for whether the lender is supposed to file a form 1099-C, if there was negotiation about the debt, even if that negotiation didn't result in any change other than from the abandoment, a 1099-C can technically be issued. But it shouldn't effect Box 5 on forms 1099-A or 1099-C.

Although this is outside my area of expertise, being a legal question, it appears that California Code of Civil procedure section 580b prohibits a "deficiency judgment" from being obtained on a purchase money loan. However, that may not be the same as loan being non-recourse.

Is it possible that renting out the property violated the terms of the loan, requiring a "refinance"?

I wish I could be of more help, but this question falls on the boundary between "tax" and "property law".
Customer: replied 5 years ago.
Thanks for the attempt anyways. Yeah I had already done extensive research and ran across those 1099-A and 1099-C instructions for the loaning instutions.

And no, loan documents don't have any stipulations on renting - only that to be owner-occupied, you have to move in and live there within 60 days, and for a period of at least a year (Rent Skimming deterrent). Owner couldn't refinance anyways since at the time that they moved out, the value of the property was below the value of the note.
Expert:  Arthur Rubin replied 5 years ago.
It looks as if you've already done as much research as I can do. I'll opt out to let someone else have a shot at it.
Expert:  Ed Johnson replied 5 years ago.

Dear solaris,

 

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)

Customer: replied 5 years ago.
Yes, please go ahead and transfer to the tax department. When I entered the question, I wasn't aware that there were different departments I could post under.

To reilliterate some points: purchase money loan in California, single-unit townhome, owner-occupied for two years, never refinanced. Currently not primary residence, no bankrupcy or insolvency. Rented for less than 3 years.

I've seen similar foreclosure situations where the bank had issued a 1099-A with Box 5 marked as Yes, and a 1099-C also issued. Since it was their primary residence, the Cancellation of Debt was excluded due to the Mortgage Debt Relief Act with IRS form 982. Technically, the 1099-A Box 5 was wrong as it was an owner-occupied, purchase-money loan in California - and it had gone through a non-judicial foreclosure, which by California's Single Action law makes it a non-recourse at that point even if the loan was originally recourse.

So assuming loan is still non-recourse (research so far shows nothing to say otherwise), if owner gets a 1099-A with Box 5 marked as Yes, what do they do if the mortgage holder refuses to correct the 1099-A? They can't easily exclude the COD using the Debt Relief Act. Thanks.
Expert:  Ed Johnson replied 5 years ago.

Dear Solaris,

 

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.

 

 

 

 

 

 

Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience: GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
Ed Johnson and 3 other Tax Specialists are ready to help you
Customer: replied 5 years ago.
Ok, thanks for your confirmation. I just needed to make sure there were no prior cases of non-recourse loans becoming recourse by nature of the primary residence being turned into a rental, either by state law, or IRS code.

If you happen to run across anything that says otherwise, please update!
Expert:  Ed Johnson replied 5 years ago.

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/

 

Customer: replied 5 years ago.
Ok, thanks for your help, much appreciated.
Expert:  Ed Johnson replied 5 years ago.

You are welcome.

 

Best of luck with this.

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