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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29918
Experience:  Taxes, Immigration, Labor Relations
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What is the tax implications on a non residence,

Customer Question

What is the tax implications for foreclosure on a non residence, refinanced property?
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.
Hi and welcome to our site!Several issues to address....The disposition of the property is reported as a sale transaction on form 8949 (if that is a personal property) or on form 4797 (if that is rental or income producing property) .Whether there is a gain or loss depends on circumstances and calculated as (selling price) MINUS (adjusted basis).In case of foreclosure - the FMV at the time of disposition is treated as the sale price.The basis is your original purchase price adjusted by improvements and some other items..If there is mortgage and the FMV is less than a mortgage balance outstanding - we need to be clear if that outstanding balance is forgiven by the creditor or you still is responsible to pay it back.If the debt is forgiven - that would be COD income - cancellation of debt income. That amount would be reported on form 1099C and generally is included into taxable income.However - under some circumstances the COD income might be excluded.For instance - there is so-called insolvency exclusion.
Expert:  Lev replied 2 years ago.
A debt includes any indebtedness whether you are personally liable or liable only to the extent of the property securing the debt. Cancellation of all or part of a debt that is secured by property may occur because of a foreclosure, a repossession, a voluntary return of the property to the lender, abandonment of the property, or a principal residence loan modification.
In general, if your debt is canceled, forgiven, or discharged you will receive a Form 1099-C (PDF), Cancellation of Debt, and must include the canceled amount in gross income unless you meet an exclusion or exception. If you receive a Form 1099-C but the creditor is continuing to try to collect the debt, the creditor may not have canceled the debt. You should verify with the creditor your specific situation; you might not have cancellation of debt or taxable income.
In general, you must report any taxable amount of a canceled debt for which you are liable as ordinary income from the cancellation of debt, on Form 1040.
Canceled debts that meet the requirements for any of the following exceptions or exclusions are not taxable.
Debt Cancellations or Reductions that Qualify for EXCEPTION to Inclusion in Gross Income:
1.Amounts specifically excluded from income by law such as gifts, bequests, devises or inheritances
2.Cancellation of certain qualified student loans
3.Canceled debt, that if it were paid by a cash basis taxpayer, would be deductible
4.A qualified purchase price reduction given by a seller
5.Any Pay-for-Performance Success Payments that reduce the principal balance of your home mortgage under the Home Affordable Modification Program
Canceled Debt that Qualifies for EXCLUSION from Gross Income:
1.Debt canceled in a Title 11 bankruptcy case
2.Debt canceled during insolvency
3.Cancellation of qualified farm indebtedness
4.Cancellation of qualified real property business indebtedness
5.Cancellation of qualified principal residence indebtedness
As that is not a principal residence - I might suggest to verify other exemptions or exclusions.
Generally, if you exclude canceled debt from income under one of the exclusions listed above, you must reduce certain tax attributes (certain credits, losses, basis of assets, etc.), within limits, by the amount excluded. You must file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the amount qualifying for exclusion and any corresponding reduction of those tax attributes.
Let me know if you need any help with reporting.