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Lev
Lev, Tax Advisor
Category: Tax
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My wife and I sold our investment condo last week in a short

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My wife and I sold our investment condo last week in a short sale. We received a 1099-s today with $85,000 listed in Box 2 Gross Proceeds. We filled out the insolvency worksheet and found ourselves to be insolvent for $80,000. We know we can subtract $80,000 from the $85,000 on a 1099-c to find the amount of reportable income for the tax year, however we didn't expect to receive a 1099-s.
Our question is, will we receive a 1099-c still, and if we do, do we subtract the amount we are insolvent from the 1099-c or the 1099-s? Basically we're just confused after expecting a 1099-c and actually receiving a 1099-s.

Lev :

Hi and welcome to our site!
The form 1099S reports the fact of sale transaction and is not related to your mortgage and outstanding debt.
As I know California is a non recourse state - and you should not expect form 1099C.
A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral.That is, the lender cannot pursue you personally in case of default.Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.

Lev :

See - http://www.irs.gov/uac/Home-Foreclosure-and-Debt-Cancellation
question 3. I lost my home through foreclosure. Are there tax consequences?
step 2 - item 4. Enter the fair market value of the property foreclosed. For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure.
So for tax reporting purposes - your selling price is the amount of mortgage outstanding just before the short sale.

Lev :

Because that is non-recourse loan - you do not have cancellation of debt income - and should not expect form 1099C - thus no need to determine insolvency.

Lev :

Please indicate "investment condo" - was that a rental property? There will be different reporting.

Customer:

It started out as our principal residence, but then we moved out and rented it. We recently decided we wanted to short sale it because we couldn't rent it for the amount of the mortgage. We never missed a payment, we initiated the short sale request and it was approved by the lender.

Lev :

Ok - when did you move out?

Customer:

4 years ago

Lev :

The disposition of the property is reported on Form 4797 - http://www.irs.gov/pub/irs-pdf/f4797.pdf - is to report the disposition of business property - rental property in your situation.
Your sale price is the amount of mortgage outstanding just before the short sale.
Your original basis is generally your purchase price. Because the property was converted to rental from personal - your basis is the lesser of your original basis and the fair market value at the time of conversion.
The basis should be adjusted by depreciation for these years the property was rented.

Customer:

i'm still confused. We were told by our real estate agent we would receive a 1099-c at the end of the year. no one ever told us we'd receive a 1099-s. So, you're saying we not going to receive a 1099-c because we're in california?

Lev :

To be precised - you need to contact your mortgage company and verify.
But because you are In California - which is a non recourse state - I do not think that you should not expect form 1099C.
Form 1099S - is a separate reporting - that is not instead of 1099C.
Because your original purchase was a personal home - it was a regular mortgage which under California law is considered a non recourse loan.
You still may contact the lender and confirm - but so far - I would not expect 1099C.

Customer:

This is definitely confusing because the internet has several references of folks receiving 1099-c's after a short sale.

Customer:

in california

Lev :

That is correct for recourse loans.
Here is reference to IRS page - http://www.irs.gov/uac/Home-Foreclosure-and-Debt-Cancellation
which discuss non recourse loans.
If you are not sure - what type of loan did you have - that need to be confirm with your lender.
California laws provide that for personal residence mortgages that should be a non recourse loan. For purchase investment and commercial properties - the law doesn't require the mortgage to be a non recourse loan.
However - again - the type of your loan need to be verified.

Customer:

our loan was for a personal residence loan. in fact, we had to get written permission from the lender to actually rent it out to someone else.

Lev :

That doesn't change anything - under California law - personal residence mortgages should be non recourse loans.
If your loan was converted to commertial recourse loan or not - that is a question to your lender - and to be on the safe side - I suggest to contact and confirm.

Customer:

Well, i know for sure the loan was not converted, it remained a personal residence loan. Okay, so, since it wasn't converted, we're back to what you said earlier right? That means we should only be receiving a 1099-s. So, that 1099-s is reportable income and not subject to insolvency claims?

Lev :

Form 1099-s doesn't report income - it reports the fact of the sale transaction.
If you have any income or loss from that transaction - that is based on your calculation on form 4797 which should be attached to your tax return.
But - you are correct - you should not expect form 1099C assuming that was a non recourse loan. Because there is NO debt forgiveness - no need to determine your insolvency.

Customer:

Okay, thank you very much for all of your help. Have a good weekend!

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