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USTaxAdvising
USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1080
Experience:  US Taxation specialist.
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Re 1099-C Mort Principal Bal Reduced. Cash Out Used to Make

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Re 1099-C Mort Principal Bal Reduced. Cash Out Used to Make Investment. Hello-We bought our house in 2006 for $350K and put $50K down. In 2009, we took cash out of my primary home ($200K) to buy vacant land ($170K) to build our dream home and payoff our cars etc ($30K). In 2010 we drew another $10K for college expenses. Land was sold in 2011 for a substantial loss ($75K with a note carry back) & we kept paying our mortgage. Due to hardship-no work 6 mos-the lender reduced the mort prin by $50K & we got a1099-C. How do I allocate our home mortgage interest ($15K), which forms do I use and how do I complete them? We rec'd $4K interest from the (land) note. And what can we expect in 2014? We still live in the house but we are considering doing a short sale next year (FMV $180/Mort principal now reduced to $460). I did the insolvency worksheet and currently we are insolvent by $305K. We are also considering bankruptcy next year. Thank you!
Submitted: 9 months ago.
Category: Tax
Expert:  USTaxAdvising replied 9 months ago.

USTaxAdvising :

Hello,

USTaxAdvising :

I am just reviewing your facts and looking up a few things, I'll be right back

USTaxAdvising :

Ok please confirm my understanding. You took a mortgage for 350K and then you took a home equity loan of 200K to buy the vacant land and payoff the cars. Is this correct?

Customer:

We refinanced and consolidated debts and took a cash out.

USTaxAdvising :

ok so the refinanced loan was secured by the home

Customer:

yes, secured by our primary home.

USTaxAdvising :

I don't see why you would be allocating the mortgage interest of 15K. It would be fully deductible even though it may not have all been used to purchase the home/land.

USTaxAdvising :

The 4K land interest income would be taxable, seperate from your mortgage interest deduction.

Customer:

I read that you can only take the interest for the original mortgage debt + 100K in equity unless you used the cash out to improve home.

USTaxAdvising :

Yes that is correct but it does not sound like you have a home equity loan.

USTaxAdvising :

You refinanced the original mortgage correct?

Customer:

yes, refinanced original loan to take cash out to buy land ($170K) and payoff cars and credit cards.

Customer:

I've been deducting only a % on Sch A. But I think I can deduct the excess interest as investment interest... But not sure.

USTaxAdvising :

Ok I am looking at your facts again here. Give me a minute.

Customer:

I have to leave for an hour, sorry. My son is locked out. Can I check back in an hr- couple of hours?

USTaxAdvising :

sure

Customer:

:) Thanks!!!

USTaxAdvising :

I'll have some answers for you. :)

Expert:  USTaxAdvising replied 9 months ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

What happens now?

If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below.
Expert:  USTaxAdvising replied 9 months ago.

Of the 200K additional home equity indebtedness only 50% is deductible as you can only deduct interest on a principal balance of 100K. If the land that was sold has reduced the 200K balance then the 50% amount may be increased. The percentage would be (100,000/current principal balance) (approximately).

 

How do I allocate our home mortgage interest ($15K), which forms do I use and how do I complete them? - There are no forms to calculate the allocation for the mortgage interest deduction. It is just reported on Schedule A. First you need to determine the amount of the interest that is allocable to the home itself (approx 350k) Therefore I would estimate the debt % of the home is 350/500* = 70% Therefore the total home indebtedness would be 15,000*70% = 10,500

*500,000= original debt of 350 + 200 additional debt - 50K forgiveness

 

The land would not be considered investment property if your purpose was to build on it for personal use. Since the land was held for personal use, and you can only deduct up to 100K of home equity indebtedness therefore only 100/200 would be available for deduction. Thus of the remaining 30% of interest paid you could only deduct 50% of it or 15%. The remaining 15% is foregone.

 

Since the 200K was reduced by 50K during the year then the 50% would increase to 66.67% (100/150*)

*150= 200K home equity debt less the 50K cancellation of debt

 

You would need to prepare two calculations to determine the amount of equity debt that is deductible. Basically you need to do a calculation up to the date of cancellation and then a calculation from the date of cancellation to the end of the year. The first half of the year would use 15% and the latter half, after cancellation, would be 20%.

 

I hope this helps. Let me know if you have any further questions.

 

Best,

Customer: replied 9 months ago.

How do I report the 1099-C and where on the forms 1040 and 982. Which boxes do I check, etc. Are there any other forms/instructions I need to read up on?

 

If the land were purchased as an investment, how it be different? Our dream was to build a house but we were very open to make a profit if the value increased significantly such as a developer buying us out. It was over 3 acres so at least 70% was held for resale. Under this scenario, can I take an investment interest deduction to offset the interest I received on the note carry-back? And no, unfortunately, we did not use any of the sales proceeds to paydown the mortgage. The buyers only put down 20%/$15,000 and we took the rest back as a note on an installment sale. Thank you!

Expert:  USTaxAdvising replied 9 months ago.

Hello,

 

How do I report the 1099-C and where on the forms 1040 and 982. Which boxes do I check, etc. Are there any other forms/instructions I need to read up on? - The 1099C income would be reported on line 21 of page 1 of your 1040. There is no special forms for it. There are not really any forms or instructions to read up on in my opinion. Have a look at the following link from the IRS to see if there is any chance you might be able to qualify to exclude it from taxable income. http://www.irs.gov/taxtopics/tc431.html

 

If the land were purchased as an investment, how it be different? - If the land was purchased as investment then I would allocate all of the interest paid for the land as a investment interest expense.(not as mortgage interest) But note that this is only deductible to the extent that you have investment income. You do not lose the deductions if you do not have investment income, the deductions get carried forward annually until you have investment income. You need to ensure your position of the property is not of personal use in order to characterize it as investment property. See link here for a definition of this - http://www.nolo.com/legal-encyclopedia/what-the-difference-between-investment-property-second-home.html,

 

Under this scenario, can I take an investment interest deduction to offset the interest I received on the note carry-back? - Yes this is correct. But only to the extent of investment income as noted above.

 

 

 

 

Customer: replied 9 months ago.

And 982? - How do I complete that? Recall We are insolvent by $305K and you indicted to add the $50K to line 1040. I already read up on it but of course it's all very confusing. The only thing I'm sure about is having to use the 982 form because 1) we are insolvent by more than the $50K 1099-C and 2) we continue to live in the residence. There is reference on the instructions to reduce basis of our house..but how/where?


 


And isn't there an investment interest form I need to use? The interest allocation is $6K and we only received $4K in interest income so I have a $2K carryover... Where do I enter this? Sch A investment interest expense? Then what happens to the $2K carryover?


 


I'm reading the instructions and can do the calculations you outlined but I'm having trouble with transferring the info on the actual forms, especially the 982.

Expert:  USTaxAdvising replied 9 months ago.

Hello,

 

And 982? - How do I complete that? Recall We are insolvent by $305K and you indicted to add the $50K to line 1040. I already read up on it but of course it's all very confusing. The only thing I'm sure about is having to use the 982 form because 1) we are insolvent by more than the $50K 1099-C and 2) we continue to live in the residence. There is reference on the instructions to reduce basis of our house..but how/where? - I provided this link for reference really. Looking more into the mortgage relief act of 2007 I don't think the 200K would qualify for exclusion as it was not for the principal residence. (Thus it would be taxable and you would not complete Form 982) See link here - http://www.irs.gov/Individuals/The-Mortgage-Forgiveness-Debt-Relief-Act-and-Debt-Cancellation Having said that I think this info might assist you when you declare bankruptcy. It is not an easy section of the tax code but you should discuss it with your bankruptcy attorney when the time comes.

 

And isn't there an investment interest form I need to use? - yes the form is Form 4952. The interest allocation is $6K and we only received $4K in interest income so I have a $2K carryover... Where do I enter this? Sch A investment interest expense? Then what happens to the $2K carryover? - The interest expense deduction is calculated on Form 4952 and is reported on Schedule A. The carryover amount is reported on line 7 of the 4952.

 

Let me know if I can assist further.

 

Best regards,

Customer: replied 9 months ago.

(Thus it would be taxable and you would not complete Form 982)


Can you double check on your answer re the Form 982?


 


Here's what it says from one of my sources:


"Insolvency Exclusion -


-Used first unless debor elects to use the PR Acq Debt Relief


-Good for both acquisition and equity debt exclusion


-Exclusion allowed to the extent of insolvency


-Insolvency is determined immediately before the debt discharge


-Must reduce tax attributes to the extent of the exclusion (exclusion can exceed attributes)


Applies to 2nd home, vacant land, credit card"


Source- www.ClientWhys.com


 


So I concluded from the language that I would be filing a Form 982 and excluding the COD income. If yes, how would I fill 982 out?


 


Sorry to make you work so hard.... :) Mostly I'm having trouble with the form completion. The arithmetic comes easier.

Expert:  USTaxAdvising replied 9 months ago.

No problem at all :)

 

Basically you should only complete:

Part I - check box 1e, enter the 50K or amount excluding in box 2, check box 3 as no.

Part II - check box 10b and enter the same amount as entered in box 2. I don't believe you would mark anything on line 10a.

 

Expert:  USTaxAdvising replied 9 months ago.
Just following up please let me know if you have any further questions.
Customer: replied 9 months ago.

Sorry but I think it's 1b, 10a and 2 that should be completed. 1e and 10b pertain to QPRI only. The debt forgiven was not QPRI. I'd really appreciate it if you can run my scenario past someone else who may be more experienced in the matter. Or, I can resubmit the question. Let me know. Thanks for your efforts.


 


Note http://www.esmarttax.com/2009-federal-form-982-instructions.asp:


Line 1e


Check this box if the income you exclude is from discharge of qualified principal residence indebtedness. Also, be sure you complete line 2 (and line 10b if you continue to own the residence after discharge). However, if the discharge occurs in a title 11 case, you must check the box on line 1a and not this box. If you are insolvent (and not in a title 11 case), you can elect to follow the insolvency rules by checking box 1b instead of checking this box. For more information, see Pub. 4681.


Line 1b


The insolvency exclusion does not apply to any discharge that occurs in a title 11 case. It also does not apply to a discharge of qualified principal residence indebtedness (see the instructions for line 1e on page 4) unless you elect to have the insolvency exclusion apply instead of the exclusion for qualified principal residence indebtedness.


Check the box on line 1b if the discharge of indebtedness occurred while you were insolvent. You were insolvent to the extent that your liabilities exceeded the fair market value (FMV) of your assets immediately before the discharge. For details and a worksheet to help calculate insolvency, see Pub. 4681.


Example. You were released from your obligation to pay your credit card debt in the amount of $5,000. The FMV of your total assets immediately before the discharge was $7,000 and your liabilities were $10,000. You were insolvent to the extent of $3,000 ($10,000 of total liabilities minus $7,000 of total assets). Check the box on line 1b and include $3,000 on line 2.


 


Line 10b


If box 1e is checked and you continue to own the residence after discharge, enter the smaller of:



  • The part of line 2 that is attributable to the exclusion of qualified principal residence indebtedness, or

  • The basis of your principal residence.


 


Line 10a


In the case of a title 11 case or insolvency (except when an election under section 108(b)(5) is made), the reduction in basis is limited to the aggregate of the basis of your property immediately after the discharge over the aggregate of your liabilities immediately after the discharge.


 


Expert:  USTaxAdvising replied 9 months ago.

HiCustomer

 

I hope I provided the answers to your original questions and also hope that you can exclude the income as I brought to your attention. I do not have extensive experience with the Form 982 but your original questions were pertaining to the items of which I believe I answered to your satisfaction.

 

I will now opt out to let another expert assist you with this question.

 

Good luck :)

 

Regards,

USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1080
Experience: US Taxation specialist.
USTaxAdvising and 6 other Tax Specialists are ready to help you
Customer: replied 9 months ago.

Thank you again for all your efforts. I do try to do the research. Yes, this is very involved. Your information was very helpful in my calculations. Looking back on my notes, I determined that in 2009, my notes revealed that 1.3 acres was to build our home and 4 acres held for resale. (in fact, I had a potential buyer lined up for 2 acres.) So I took 25% personal and 75% investment, etc. I'll have to amend our 2009. I didn't take a capital loss for the investment portion when we sold the land. Our exchanged proved very helpful, thanks!

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