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I live in California and recently did a short sale (Nov. 2010)

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on my investment property in...
I live in California and recently did a short sale (Nov. 2010) on my investment property in Florida. The house sold for $75,000 and I owed $370,000. I got a 1099-C from the lender. am thinking about filing for insolvency to avoid the tax bill from the 1099-C. I have very little in savings ($5k), I have two cars 10 years old each (both paid off), my primary residence value is $150k below what I owe on the first loan, I am negotiating with the lender to settle the second loan on my primary residence for about 5-10% of what I owe (currently $150k), and I actually had a foreclosure on my other investment home in Florida in Oct. 2009.

-Would it be adviseable to go the insolvency route for tax year 2010?
-Is the combined $350,000 in 401k funds my wife and I have at risk?
-What impact does current salary have on filing for involvency?
-Is it as simple as Filing IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, with your tax return and sending the IRS a detailed letter with a financial statement showing your insolvency?
Submitted: 6 years ago.Category: Tax
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2/1/2011
Tax Professional: Wendy Reed, Enrolled Agent replied 6 years ago
Wendy Reed
Wendy Reed, Enrolled Agent
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Experience: 15+ years tax preparation and tax advice.
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Thank you for giving me the opportunity to assist you. I will give the best answer that I can with the information provided.

 

Hello there,

Current income has nothing to do with insolvency, it is simply a calculation of your total debts (immediately before forgiveness of debt) minus your total assets.

 

Since you live in CA--you must list your assets according to community property law--generally 50-50%.

 

You are not required to send the IRS a worksheet of assets and debts or a detailed letter. Less is best when filing. If they ask for this later though, you would want to have the information available. There is a worksheet in Pub 4681 to help you calculate insolvency. http://www.irs.gov/pub/irs-pdf/p4681.pdf

 

Form 982 is relatively simple, you need to check the correct box and enter the amount of debt that can be excluded due to your insolvency.

Wendy Reed
Wendy Reed, Enrolled Agent
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Customer reply replied 6 years ago
The 1099-C I received is for a second home in Florida that sold in Nov. 2010 for $75,000 (FMV - box 7) and had a loan balance of $348,000 (box 2) with an interest amount included in box 2 of $53,561 (box 3).

I am confused about the assets and liabilities worksheet for Form 982. I understand I need to reflect assets and liabilities at the time of the debt discharge but am I to include the 2nd home (1099-C) info for this calc (2nd home's value as the asset value and assoc. loan balance as the liability)? I also recently obtained by father's house though a quick claim deed prior to his passing in Jan. 2010 and do not know if I should include the IRA I also inherited as sole beneficiary (yet to be rolled over into my name) and house as my assets at the time of debt discharge.

Here are the facts as of Nov. 2010, date I did the short sale on the second home in Florida for which I received the 1099-C:

Please verify the assets and liabilities listed below for myself and my wife apply for my Form 982 worksheet calculation:

Assets at time of debt discharge 11/10 :

Dad's house FMV on 11/10 obtained through quit claim deed on 12/09: $110,000
Inherited IRA on Jan. 2010 (date of death) - still in estate account - not rolled over into my name: $109,000
Checking/Savings: $3000
Primary residence FMV: $500,000
2nd home (1099-C) in Florida FMV: $75,000
401k for myself and wife: $390,000

TOTAL ASSETS w/o Dad's house and inherited IRA: $995,000
TOTAL ASSETS w/ Dad's house and inherited IRA: $1,214,000

Liabilities at time of debt discharge 11/10:

Primary residence 1st and 2nd loans: $810,000
Dad's house loan: $65,000
2nd home (1099-C) loan: $365,000
Credit cards: $4,000
Medical bills: $12,000

TOTAL LIABILITIES w/o Dad's house and inherited IRA: $1,191,000
TOTAL ASSETS w/ Dad's house and inherited IRA: $1,256,000

PLEASE CLARIFY IF I AM LIABLE FOR THE 1099-C INCOME ($348,000 - 75,000 = $273,000)
Tax Professional: Wendy Reed, Enrolled Agent replied 6 years ago

Sorry for the delay--needed to do research.

 

Cancellation of debt as income is determined as loan balance minus FMV on 'Recourse loans" (for which you are personally responsible). See: http://www.irs.gov/newsroom/article/0,,id=174034,00.html

 

For sample calculations.

 

If the assets that you inherited from your father are owned by you, and you have access to these funds/property, then they are considered your assets. Think of it like this---if you were trying to qualify for a loan, and you were listing your assets and property---would the inherited property be part of this list? Retirement funds are also considered assets.

 

It appears that you are insolvent to the degree of $42K--

 

Please note, that since this is an investment property you may have a deductible loss. Calculation for the loss on property examples can also be found:

http://www.irs.gov/newsroom/article/0,,id=174034,00.html

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Customer reply replied 6 years ago

I am not clear by your answer ($42K involvent) if I am liable for all or some of the 1099-C income. Please see the first paragraph of my question and the last sentence of my qustion.

Tax Professional: Wendy Reed, Enrolled Agent replied 6 years ago

The 273 K is the amount of cancellation of debt from the property that is potentially subject to income tax.

 

From your insolvency worksheet, your total debts were $42,000 more than your total liabilities, so using the insolvency exception, you could exclude $42K of the 273K from income.

 

 

Wendy Reed
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