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taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
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Experience:  Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
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Our home foreclosed on April 18, 2012 For federal and California

Resolved Question:

Our home foreclosed on April 18, 2012
For federal and California state income tax purposes, how do we report it?
The time line is thus
1. We bought a First home on CA in 1987 for $75 K
2. We purchased and moved to a Second home in May 1992 and converted First house to a rental property.
3. The First house caught fire on the 28th of December in 2004 while rented.
4. Insurance paid $25K for damage not reportable to IRS
5. We repaired and remodeled First house and moved back into it at the end of 2005.
6. We refinanced First house as owner occupied for the amount of $194,600 on November 16, 2007 to pay for repairs and remodeling of the home. Additionally, at the same time, we opened a line of credit for the amount of $27,800.
7. On the LOC of 27,800, we used only $8400 for home improvement.
8. My wife moved out of First house in August 2009 back to Second house.
9. I stayed at First house until it foreclosed on April 18, 2012 for the amount of $96,600.
10. I received 2 form 1099-Cs from Chase (mortgager). One shows debt cancelation in the amount of $98,000 (against the loan amount of $194,600) and the other shows debt cancelation for $8,400 covering the LOC balance.

Here are our questions:

1. Do the Re-fi and LOC qualify for home mortgage forgiveness relief?
2. What happens to depreciation recapture for the period it was used as a rental? We lived there for more than 3 years prior to foreclosure thus making it our primary residence.
3. We are using Turbo Tax to do our taxes, but it doesn’t seem to separate sale from foreclosure.
Submitted: 11 months ago.
Category: Tax
Expert:  taxmanrog replied 11 months ago.
Hi! Thanks for letting me answer your question!

I am sorry to hear about the foreclosure! This is becoming a regular occurrence in this economy.

Under the Mortgage Debt Relief Act of 2007, as long as the mortgage is in the homeowner's name, and the home is the primary residence, which in your case appears to be, the debt forgiven is not taxable. I am not clear as to how much of the LOC you used in total, only that $8400 was used for home improvement. Amounts used for home improvement are not taxable when forgiven as well.

As for the depreciation recapture, I would need more information. You bought the house for $75k. How much were the improvements on it? IF your basis in the home exceeds the debt forgiven, you might now have any recapture, as there is a loss on the sale.

As far as Turbotax goes, a foreclosure is the same as a sale of your primary residence, with no losses recognized.

I hope this helps! IF you provide me with more details as to the cost and your basis, I can give you a better answer on the recapture.

Also, please remember to rate me if you think this was helpful!
Customer: replied 11 months ago.

1.If the lender has forgiven the debt (refinanced and LOC amounts), then is the cost basis or recapture amount or even the fact that it was a rental unit 8 years prior to foreclosure, relevant?


 


2. In turbo tax, under "Less Common Income" section I can input the 1099C info directly. There it does not ask for any additional information like cost basis, at all. So which would be the right way?

Customer: replied 11 months ago.

If we were to address this issue without turbo-tax, is there a form we could fill out and attach? or any other way?

Expert:  taxmanrog replied 11 months ago.
As I said, if there is an overall loss, then I don't believe recapture will play any part. There has to be profit to allocate to recapture.

As far as the Turbotax goes, I don't know if it will allow you to exclude the cancellation of debt income for mortgage forgiveness. I use Lacerte, which is also made by Intuit (but costs about $10k per year) and I have an area where I put in the 1099-C amount, then I have another field for the qualified mortgage interest amount.

As far as the foreclosure, if you did not receive a 1099-S from the title company when the bank took the house, you do not have to report the sale. I often do just to start the statute of limitations tolling, but as the loss is not deductible, there is no need for this either.

I just went to Intuit's support site and logged in with my Lacerte ID, and it let me into Turbotax support. Here is what I found for Qualified Mortgage Deb Cancellation:

Don't worry! TurboTax will ask you about any debt you have had canceled. We will fill out the forms and perform all the calculations for you.

If you've already gone through the step-by-step interview and want to jump directly to the entry screen for this topic, follow these directions.

  1. Select the Federal Taxes tab (the Personal tab in Home & Business).
  2. Select the Wages & Income subtab.
  3. Scroll down the Wages & Income screen until you see the Less Common Income section.
  4. Click on the Start/Update button to the right of Miscellaneous Income, 1099-A, 1099-C.
  5. Follow the Prompts.

The support site assures me that the program will calculate the amount of qualified mortgage interest cancellation that is excluded for you.


I hope this helped!

Please don't forget to rate me!

Thanks!
Customer: replied 11 months ago.

Thanks. It helped a lot. I re-did the 1099C worksheet. At the end it re-directed me back to Sale of Home(gain or loss) section. I plugged in the accurate numbers to calculate the cost basis and it tells me that I have a taxable gain of $14000.


 


Capgain exclusion for a married couple from a sale of main home is 500K. Why is this gain of 14K taxable?

Expert:  taxmanrog replied 11 months ago.

Is your basis less than the amount of the debt forgiven? What did TurboTax calculate your basis as? You have $106,400 of debt forgiven. Your original LOC was for $27,800. Did you use the entire line? You said you used $8,400 for home improvements. If the balance was used for other things, credit card payments, personal things, cars, etc., then that portion can't be forgiven. TurboTax may be using some sort of ratio for this. Let me know how much of the equity line was used, and what it was used for. Then I can answer better.

 

Thanks!

 

Customer: replied 11 months ago.

My original cost was $77555 inclusive of all fees. Improvements and additions worth $28000 after fire damage were offset by insurance money hence I did not claim them in turbo-tax. I had claimed a total depreciation of $14220 during the rental phase of the house. This I entered as recapture in turbo-tax. Only $8400 was used out of the HELOC for improvements before the bank curtailed that amount from $27800 to $8400 claiming depreciation in home prices.


The amount that Turbo-Tax says is taxable is exactly the amount i entered as depreciation recapture. Is the insurance claim money reportable to IRS even after the fact? Thanks

Expert:  taxmanrog replied 11 months ago.
Yes, this looks like the depreciation recapture. Your original cost was $77k but I thought you said you took out a second loan for $195k for renovations? Plus the $8400 HELOC. This would put your basis at about $280k, less the depreciation. If you give me some time I can see how to eliminate the depreciation recapture. Perhaps if you increase the basis in TurboTax to the $280k number? I will check. If the house is sold at a loss, there should be no recapture.

As far as the insurance goes, it is not an issue that affects this, as it was only to repair the property, it did not improve or extend the life, it just brought it back to where it was before the fire.
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 373
Experience: Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
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