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This is for Megan C Please help with the calculation of

Customer Question
This is for Megan C Please...
This is for Megan C

Please help with the calculation of the following so I have a better understanding.

What is the amount considered to be received or cancelled recourse debt of $50,000 on property with a FMV of $42,000?

What is the amount considered to be received on cancelled nonrecourse debt of $90,000 on property with a FMV of $99,000?
Submitted: 4 years ago.Category: Tax
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10/18/2013
Tax Professional: Lane, JD, CFP, MBA, CRPS replied 4 years ago
Lane
Lane, JD, CFP, MBA, CRPS
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Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Lane :

Hi, can I help?

Lane :

The fair market value of the property is not really relevant to the amount of cancelled debt

Lane :

Fair Market value WILL come into play if you, say, sell the asset for a gain (sales price minus basis = capital gain) ... but the cancelled debt is considered income by IRS because its a net increase in wealth (money that was borrowed and used for something but not paid back

Lane :

IRS has ALWAYS counted forgiven debt as income ... but with the 2007 debt forgiveness act (now extended through 2013) they are waiving - by your filing a 982 form any income tax on this forgiven debt in three scenarios; (1) primary residence mortgage forgiveness (2) Debt forgiven while insolvent (where your debts are higher than your assets) and (3) bankruptcy

Lane :

So the amount on that 1099-C that the lender gives you is HOW much is forgiven (the amount THEY will write off on their taxes as a bad debt) and IS the amount that would normally have been taxable. For this year, however, IRS is waiving the tax on that forgiven debt.

Lane :

You file form 982, essentially to tell the IRS that this is one of those three types of exemptions (1) Primary residence mortgage indebtedness (2) debt forgiven while you were insolvent or (3) Debt discharged in bankruptcy

Lane :

Now, what you have to understand is that forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.

Lane :

The way you wrote your question...

The answer to the first one is $50,000 (it's forgiven recourse debt).

The answer to the second on is zero, because the debt was non-recourse.

Lane :

Fair market value of the property is irrelevant. (to the amount of debt forgiven) ... forgiven debt is the amount of recourse debt outstanding when the lender forgives it

Lane :

On a non-recourse loan, there IS no forgiven debt because the lender sells the house and cannot come after the person ... the debt is considered paid off by the asset, so (conceptually) there is no debt left to forgive

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Customer reply replied 4 years ago
I know so help me understand. What are the calculations?
Tax Professional: Lane, JD, CFP, MBA, CRPS replied 4 years ago

 

The amount of the 1099 is the amount forgiven.

 

Fair market value of the asset is irrelevant.

 

There IS no calculation, unless you're talking about insolvency

 

 

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 4 years ago

The way you wrote your question...

The answer to the first one is $50,000 (it's forgiven recourse debt.

The answer to the second on is zero, because the debt was non-recourse.


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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 4 years ago

Just to maybe help provide some of the logic here.. for non-recourse debt the loan is considered satisfied when the asset is taken and sold ... the lender cannot come after the borrower, because the asset .. the collateral has satisfied the debt.

For a RECOURSE loan the lender can still come after the borrower EVEN AFTER foreclosing, so that debt is considered forgiven.

Hope this helps
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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 4 years ago

Maybe this will help:

From IRS, here: http://www.irs.gov/Individuals/The-Mortgage-Forgiveness-Debt-Relief-Act-and-Debt-Cancellation-

Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

  • child" style="margin: 0px 0px 0px 20px;padding: 0px;border: 0px none;font-family: inherit;font-size: inherit;font-style: inherit;font-variant: inherit;font-weight: inherit;line-height: inherit;vertical-align: baseline;">Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
  • Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
  • Insolvency: If you are insolvent when the debt is canceled, some or all of the canceled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
  • Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your canceled debt is generally not considered taxable income.
  • Non-recourse loans: 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. However, it may result in other tax consequences.

Make sense?

There really are no "calculations" and the fair market value doesn't really come into play ... it's just how much debt was forgiven?

Lane
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Customer reply replied 4 years ago
Wouldn't the second one be $90,000?
Tax Professional: Lane, JD, CFP, MBA, CRPS replied 4 years ago


The second one is nonrecourse, so it's not taxable at all.

Now, if you're asking how much debt was forgiven? Then yes, 90,000 was CANCELLED, but it's not taxable at all

Again, from above; 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 the borrower personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.
Lane
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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 4 years ago
Hi Diana,


I'm just following up with you to see how everything is going. Did my answer help?


Let me know,
Lane
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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 4 years ago

Thank you Diana!

Lane
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