How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask Richard Your Own Question

Richard
Richard, Tax Attorney
Category: Tax
Satisfied Customers: 46179
Experience:  29 years of experience as a tax, real estate, and business attorney.
17027240
Type Your Tax Question Here...
Richard is online now
A new question is answered every 9 seconds

Short sold our home last year. We have forgiven debt on this

Resolved Question:

Short sold our home last year. We have forgiven debt on this house and using the insolvency form to lessen our liability. Do we qualify for and is it possible to "elect the Exclusion for sale of your main home"?
Submitted: 11 months ago.
Category: Tax
Expert:  Richard replied 11 months ago.
Hi! My name is XXXXX XXXXX I look forward to helping you!

Was this debt that was forgiven used to purchase or improve your home? Thanks.
Customer: replied 11 months ago.

It was a HELOC loan. We used $100k for improvements, but the remaining amount for other purchases $135k. We were forgiven $183k.

Customer: replied 11 months ago.

Thank you, XXXXX XXXXX a HELOC loan. We used $100k for improvements. the remaining $135k for other purchases. We were forgiven $183.5k.

Expert:  Richard replied 11 months ago.
Thanks for your reply. With regard to the insolvency exclusion, you qualify if immediately before the forgiveness your liabilities exceeded your assets. To help you calculate this, you would use IRS Publication 4681 which you can find at http://www.irs.gov/pub/irs-pdf/p4681.pdf .

The portion of the debt you used for improvements would be excludable as forgiveness related to your principal residence. But under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was $2 million or less. The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its instructions. The debt must have been used to buy, build or substantially improve the taxpayer's principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available. See Form 982 for details.



Thank you so much for allowing me to help you with your questions. I have done my best to provide information which fully addresses your question. If have any follow up questions, please ask! If I have fully answered your question(s) to your satisfaction, I would appreciate you rating my service as OK, Good or Excellent (hopefully Good or Excellent). I thank you in advance for taking the time to provide me a positive rating!
Customer: replied 11 months ago.

Thank you,


So with the $100k improvements is 42.55% of the loan amount. Does that mean of the $183.5k foregiven debt, $78.1k is no taxable?

Expert:  Richard replied 11 months ago.
Here's the way the IRS orders things when the principal residence exclusion applies to only a portion of the loan (http://www.irs.gov/publications/p4681/):

"Ordering rule. If only a part of a loan is qualified principal residence indebtedness, the exclusion applies only to the extent the amount canceled is more than the amount of the loan (immediately before the cancellation) that is not qualified principal residence indebtedness. The remaining part of the loan may qualify for another exclusion.
Example.

Ken incurred recourse debt of $800,000 when he bought his main home for $880,000. When the FMV of the property was $1,000,000, Ken refinanced the debt for $850,000. At the time of the refinancing, the principal balance of the original mortgage loan was $740,000. Ken used the $110,000 he obtained from the refinancing ($850,000 minus $740,000) to pay off his credit cards and to buy a new car.

About 2 years after the refinancing, Ken lost his job and was unable to get another job paying a comparable salary. Ken's home had declined in value to between $700,000 and $750,000. Based on Ken's circumstances, the lender agreed to allow a short sale of the property for $735,000 and to cancel the remaining $115,000 of the $850,000 debt. Under the ordering rule, Ken can exclude only $5,000 of the canceled debt from his income under the exclusion for canceled qualified principal residence indebtedness ($115,000 canceled debt minus the $110,000 amount of the debt that was not qualified principal residence indebtedness). Ken must include the remaining $110,000 of canceled debt in income on line 21 of his Form 1040 (unless another exclusion applies).

How to report the qualified principal residence indebtedness exclusion. To show that all or part of your canceled debt is excluded from income because it is qualified principal residence indebtedness, attach Form 982 to your federal income tax return and check the box on line 1e. On line 2 of Form 982, include the amount of canceled qualified principal residence indebtedness, but not more than the amount of the exclusion limit (explained earlier). If you continue to own your home after a cancellation of qualified principal residence indebtedness, you must reduce your basis in the home as explained under Reduction of Tax Attributes, next."
Richard, Tax Attorney
Category: Tax
Satisfied Customers: 46179
Experience: 29 years of experience as a tax, real estate, and business attorney.
Richard and 2 other Tax Specialists are ready to help you
Customer: replied 11 months ago.

Thank you so much! One more quick question:


 


On the Insolvency form: Part III Line 3b & 3c:


 


3b. Mortgages on real property, nonrecourse:


3c. Mortgages on real property, recourse:


 


We had a primary loan paid in full.


Part of the secondary load paid off, and the remaining forgiven.


Our current home has a primary loan.


Where do I put all three mortgages nonrecourse or recourse?


 

Expert:  Richard replied 11 months ago.
California is a non-recourse state with regard to purchase money loans. So, if your current loan was used to purchase your new home, it would be a non-recourse loan. On your short sale house, the first lien loan, if obtained to purchase the house, would have been a non-recourse loan. If it had been refinanced, then it would be a recourse loan. The HELOC would have been recourse. :)
Customer: replied 11 months ago.

Homes are in CA. For Federal taxes, same thing?


 

Expert:  Richard replied 11 months ago.
Yes...same thing...recourse or nonrecourse is determined at the state level. :)

Thanks so much for the positive rating and bonus! I appreciate your kindness and the opportunity to serve you!
Richard, Tax Attorney
Category: Tax
Satisfied Customers: 46179
Experience: 29 years of experience as a tax, real estate, and business attorney.
Richard and 2 other Tax Specialists are ready to help you
Expert:  Richard replied 11 months ago.
I just wanted to thank you once again for taking the time to rate me so positively! It means a lot!
Customer: replied 11 months ago.

You're very welcome. Thank you for your quick responses. Have a lovely day!

Expert:  Richard replied 11 months ago.
Thank you so much for the kind words! You too! :)

JustAnswer in the News:

 
 
 
Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.
 
 
 

What Customers are Saying:

 
 
 
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
< Last | Next >
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
  • I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight. Bonnie Chesnee, SC
  • Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation. John Minneapolis, MN
  • Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with. Orville Hesperia, California
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C. Freshfield, Liverpool, UK
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex Los Angeles, CA
  • Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP Hesperia, CA
 
 
 

Meet The Experts:

 
 
 
  • Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
< Last | Next >
  • http://ww2.justanswer.com/uploads/KU/KUMI95/2013-9-30_195031_kumar.64x64.jpg Wallstreet Esq.'s Avatar

    Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
  • http://ww2.justanswer.com/uploads/CU/Cuttinggirl/2011-10-29_03719_wcrop2.64x64.jpg Wendy Reed's Avatar

    Wendy Reed

    Enrolled Agent

    Satisfied Customers:

    3052
    15+ years tax preparation and tax advice.
  • http://ww2.justanswer.com/uploads/CATax/2009-08-04_204548_Mark.jpg Mark D's Avatar

    Mark D

    Enrolled Agent

    Satisfied Customers:

    985
    MBA, EA, Specializing in Business and Individual Tax Returns and Issues
  • http://ww2.justanswer.com/uploads/IN/insearchoftheanswer/2013-8-16_0233_attorney.64x64.jpg Richard's Avatar

    Richard

    Tax Attorney

    Satisfied Customers:

    3229
    29 years of experience as a tax, real estate, and business attorney.
  • http://ww2.justanswer.com/uploads/MY/MyVirtualCPA/2012-7-5_44024_cookmegan1.64x64.jpg Megan C's Avatar

    Megan C

    Certified Public Accountant (CPA)

    Satisfied Customers:

    6121
    Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
  • http://ww2.justanswer.com/uploads/JG/jgordosea/2012-6-7_43138_GordosVeritas.64x64.jpg jgordosea's Avatar

    jgordosea

    Enrolled Agent

    Satisfied Customers:

    2783
    I've prepared all types of taxes since 1987.
  • http://ww2.justanswer.com/uploads/OZ/ozaukeecpa/2012-6-7_193219_Picture1croppedandshrunk.64x64.jpg MequonCPA's Avatar

    MequonCPA

    Certified Public Accountant (CPA)

    Satisfied Customers:

    2231
    CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.