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Jon Andrews
Jon Andrews, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 3118
Experience:  I deal with all levels of tax planning and controversy - from the ordinary to the complex.
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I recently received a 1099c from a bank that I had taken a

Customer Question

I recently received a 1099c from a bank that I had taken a construction loan out for an investment property. I had worked an agreement with the bank on a deed in lieu of foreclosure. The reason for the deed in lieu was because I had won a summary judgment against the bank, mortgage broker and builder for a real estate marketing scheme that they had all taken part in to defraud my self and other investors. The bank is now writing off the property at a loss of $121,000. The IRS will see this as a capital gain for me. My questions are the following:
On my end there was no capital gain. The bank took the property back and forgave the debt because of the summary judgment. I had to incur all the legal fees and interest paid to the bank plus the down payment on the property. My total losses were about $25,000 to $30,000 over the past three years. Will the IRS still see this as a capital gain for me and if they do what steps do I need to take with the IRS to resolve this issue
Submitted: 4 years ago.
Category: Tax
Expert:  Jon Andrews replied 4 years ago.

What were the specifics of the summary judgment? What did you sue for specifically? What were you awarded? Who was were the defendants? How was the judgment structured by the court? What were the terms of your agreement with the bank relating to the deed in lieu? What was the principal amount of the loan before the deed in lieu? Did you have any advances on the construction loan other than the initial purchase? Did you have any actual constructions costs that you paid?

 

jon

Customer: replied 4 years ago.

When I get back to my office in the am I will check the specifics of the summary judgment. I sued for fraud and misrepresentation. The defendants were the builder, mortgage broker and the bank. All three parties had setup the marketing plan to sell invesment properties with very little money down and no payments on the loan until after the six months. The homes were supposed to be built within 6 months so that the investor could flip for a profit. At the time I invested the builder was aready 1 year behind on contracts. After six months the bank charges 8% interest on the loan and would also charge a penalty for paying the loan off early. There were also hidden fees and cost on the morgage thrown in by the bank and broker. I will have to get the terms of the agreement with the bank from my office. The initial principle amount of the loan was $90,000 the interest after 2 years of non payment brought the total amount owed to $127,000. There was a $10,000 advanced taken from the loan by the builder that was never returned. I also paid a $2,000 down payment to the builder . I was rewarded $5,000 from the builder. $500.00 from the mortgage broker and the deed in leui from the bank. My legal costs were about $15,000. I paid about $10,000 in interest to the bank after after 1 year of payments and still no house after 1 year and six months from the original contract date.

Customer: replied 4 years ago.

I can email you the summary judgment. It is PDF format.

Expert:  Jon Andrews replied 4 years ago.

You should be able to attach it and upload it to the site.

 

jon

Customer: replied 4 years ago.
Expert:  Jon Andrews replied 4 years ago.

This is going to be a big pain for you to deal with - but it seems like you have already been through a lot. I have outlined steps for you to take below. These only relate to how to file this on your tax return not any other issues (for example, I think the bank probably should not have issued a 1099C in this instance - but that is outside the scope of this answer).

 

The first thing you will need to do is create a separate schedule to report some items and write in on line 21 of Form 1040 "See attached schedule". On the schedule, you should list the income shown on the 1099C. On the next line, you should write "Amount excluded from income" and show the same amount as a minus so that the net is $0. Below that you should write a narrative, similar to what you have posted here, stating that the lender was acting in conjunction with the seller and, as such, $100,000 of this debt relief qualifies as a "purchase price adjustment". The remainder is excludable because, had it been paid, it would have resulted in a tax deduction of the same amount (for interest on a business debt). Then on Schedule C, you should show sales of $0 (unless you have other business income to report) PLUS any amount that you have actually received back from the builder or broker and, under cost of goods sold, list the total amount of out of pocket cost that you have with respect to the actual property. Based on the information above, this would be the $2,000 down payment. Then in the expense section of the Schedule C you should list your other expenses - interest, legal fees, etc - but only the amount that you actually paid out of pocket.

 

You should keep documentation with your tax files for this year of all of the facts listed here as well as (this is IMPORTANT) your intent to flip this property. That intent is what allows this to be treated as business expenses/loss rather than a capital loss combined with "expenses for the production of income" which are only deductible as itemized deductions.

 

jon

Jon Andrews, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 3118
Experience: I deal with all levels of tax planning and controversy - from the ordinary to the complex.
Jon Andrews and other Tax Specialists are ready to help you
Customer: replied 4 years ago.

Jon,

 

Thanks for your help with a very complicated tax issue. I did not see the attached schedule on the answer page?

Expert:  Jon Andrews replied 4 years ago.

I did not actually create a schedule...the "see attached schedule" above is what you need to write in on line 21 of the Form 1040.

 

jon

Customer: replied 4 years ago.

Thanks!

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