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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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My parents received a 1099-A from bank that held mortgage on

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My parents received a 1099-A from bank that held mortgage on principle residence for 2008. Home foreclosed in May 2008, dad passed away in Jun 2008. Block 2 has balance $280,000 and block 4 FMV $219,375. What, if any has, to be considered ordinary income in 2008?
Hello Parrot,

Was box 5 of the 1099a form marked "yes" or "no"?

How long had they owned the home and how long did they live there as their primary residence?

Customer: replied 8 years ago.

Box 5 is yes and they lived in the home for about 7 years...



Hello again Parrot,

Your mother will not owe any tax on this transaction.

Even though this was a foreclosure, it will basically be treated the same as a sale of the home. Since box 5 is marked "yes" that means they had a recourse loan. With a recourse loan, the "sale price" is deemed to be the smaller of either the FMV or the outstanding loan balance. In your case the selling price would be $219,375.

Your mother needs to report this on Schedule D as a sale of her personal residence. She will show the sale price of $219,375 and then deduct from that her basis in the home (her original cost). If she has a gain, since this was her primary residence for more than 2 years, she can automatically exclude from the gain $250,000 ($500,000 if married filing a joint return).

Since the "selling price" itself is less than the exclusion she is allowed, she will owe no tax. However, the transaction needs to be reported on Schedule D, as the IRS will be looking for you to report the receipt of that 1099A form.

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Thank you.
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