Bankruptcy / Foreclosure Question

[diverjasongray]

Las Vegas Nevada

I am writing this as a means of assisting my aunt and uncle who have a strange situation.

They owned a home in Las Vegas Nevada and during the bubble, they both found themselves unemployed. Mortgage payments were missed. They received a notice on their door that said they would be evicted the next day if they didn't pay. They left.

They filed for bankruptcy months later and everything was discharged including their first and second mortgage.

Here is where it gets tricky...

The mortgage company never actually foreclosed on the house. My aunt and uncle's name were on the title even after the debts had been discharged. A realtor, years later, contacted them and informed them their name was still on the deed and she would like to help short sale the home to get their name off of the property. Their was a buyer lined up who ended up buying the home. During this time, the deed to the home could not be found. It took months to process. But eventually it was and the deal finalized.

This years tax season bought them a new surprise when they received a 1099 for a forgiveness of debt. As I understand it, they had no interest other than their name on the deed in the property, and they are now hit with a large tax bill. I am just looking for a little advice on how to proceed and assist them.

I think it was absolutely foolish for them to even agree to the short sale. They should have contacted the mortgage company and asked to have their names removed from the deed.


Any assistance would be greatly appreciated.

J

 

[Zigner]

Las Vegas Nevada

I am writing this as a means of assisting my aunt and uncle who have a strange situation.

They owned a home in Las Vegas Nevada and during the bubble, they both found themselves unemployed. Mortgage payments were missed. They received a notice on their door that said they would be evicted the next day if they didn't pay. They left.

They filed for bankruptcy months later and everything was discharged including their first and second mortgage.

Here is where it gets tricky...

The mortgage company never actually foreclosed on the house. My aunt and uncle's name were on the title even after the debts had been discharged. A realtor, years later, contacted them and informed them their name was still on the deed and she would like to help short sale the home to get their name off of the property. Their was a buyer lined up who ended up buying the home. During this time, the deed to the home could not be found. It took months to process. But eventually it was and the deal finalized.

This years tax season bought them a new surprise when they received a 1099 for a forgiveness of debt. As I understand it, they had no interest other than their name on the deed in the property, and they are now hit with a large tax bill. I am just looking for a little advice on how to proceed and assist them.

I think it was absolutely foolish for them to even agree to the short sale. They should have contacted the mortgage company and asked to have their names removed from the deed.


Any assistance would be greatly appreciated.

J

They should start by contacting the attorney that assisted them with their bankruptcy - that attorney should be able to advise them on their next step(s).

 

[despritfreya]

The mortgage was discharged in bk. There is no forgiveness of debt income. See the following link for the form that needs to be filed. Contact a CPA.

https://www.irs.gov/pub/irs-pdf/f982.pdf

Des.

 

[Zigner]

The mortgage was discharged in bk. There is no forgiveness of debt income. See the following link for the form that needs to be filed. Contact a CPA.

https://www.irs.gov/pub/irs-pdf/f982.pdf

Des.

It's more complicated than that - they need to speak with the attorney. I suspect that their debt was reaffirmed.

 

[LdiJ]

It's more complicated than that - they need to speak with the attorney. I suspect that their debt was reaffirmed.

I disagree. Its not more complicated than that. Many mortgage companies declined to take possession of properties discharged in bankruptcy. Its a simple matter to include the discharged 1099C income on their tax return and then exclude it via form 982 as a bankruptcy discharge. There is absolutely no reason to suspect that the debt was reaffirmed.

 

[Zigner]

I disagree. Its not more complicated than that. Many mortgage companies declined to take possession of properties discharged in bankruptcy. Its a simple matter to include the discharged 1099C income on their tax return and then exclude it via form 982 as a bankruptcy discharge. There is absolutely no reason to suspect that the debt was reaffirmed.

Fair enough - I hope it's that simple

 

[despritfreya]

It's more complicated than that. . . I suspect that their debt was reaffirmed.

While I see there were additional responses, please note that OP stated:

They filed for bankruptcy months later and everything was discharged including their first and second mortgage.

(Emphasis added.)

Des.

 

[Zigner]

While I see there were additional responses, please note that OP stated:

(Emphasis added.)

Des.

I agree that the OP stated that it was discharged in BK, but this is a third-party OP and I based my response on what has occurred, not what the OP thinks happened in a case from several years ago that s/he wasn't involved in.

 

[diverjasongray]

Their CPA is the person who is raising the flags.

The box on the 1099 (Box 5) I believe is checked for IS responsible.

J

 

[LdiJ]

Their CPA is the person who is raising the flags.

The box on the 1099 (Box 5) I believe is checked for IS responsible.

J

Then their tax professional does not know what he/she is doing. The debt was discharged in bankruptcy and therefore is excludable on their income tax return using the method I previously described. The debt would also be excludable under at least one other provision in the tax law as well. Therefore they probably need a different tax professional.

 

[despritfreya]

Their CPA is the person who is raising the flags.

Unless they reaffirmed the obligations, as suggested by Zigner, the obligations were discharged. No income. If the "CPA" states otherwise or does not understand the IRC, I suggest they find another one.

https://www.irs.gov/taxtopics/tc431.html

Amounts that meet the requirements for any of the following exclusions are not included in income, even though they are cancellation of debt income. . . 1.Debt canceled in a Title 11 bankruptcy case. . .

(Emphasis added.)

Des.

 

[davew128]

Then their tax professional does not know what he/she is doing. The debt was discharged in bankruptcy and therefore is excludable on their income tax return using the method I previously described. The debt would also be excludable under at least one other provision in the tax law as well. Therefore they probably need a different tax professional.

While I don't disagree with your application of the law, we're not there asking questions and getting answers from the people who lived through it.

I can also tell you that this year alone I've seen two 1099-Cs associated with the short sales of homes here in CA, which if you were familiar with California real estate law would say should not have been issued. Point being, banks are notorious for issuing 1099 A and C regardless of how correct they are or are not.