Deed in Lieu Tax Question with 1099

[jenelle0110]

Minnesota

My mortgage company has suggested I do a Deed in Lieu instead of a short sale on a rental property that I cannot fill or pay for. They say they treat them the same when it comes to the 1099 and credit reporting. So a Deed in Lieu is much faster.

I would be (am currently) insolvent. Both my current house and the rental house that I plan to do a deed in lieu of foreclosure are both upside down due to the market.

Is it true that I calculate my insolvency at the time immediately before the Cancellation of Debt (COD) occurs (IRS Pub 4681). Therefore since the house is going to be my loss creating an insolvent basis of approx $35,000-45,000 wouldn't that pretty much mean it zero's itself out as long as I don't have any other assets worth anything? Would I then fill out form 982? or to prove insolvency - do I have to file bankruptcy? Since the house will be sold by the Mortgage company, isn't what they receive a true market value. Wouldn't i use that amount to base the amount for the Debt and therefore be the same amount as the COD?

Thank you,

Jenelle

[LdiJ]

Minnesota

My mortgage company has suggested I do a Deed in Lieu instead of a short sale on a rental property that I cannot fill or pay for. They say they treat them the same when it comes to the 1099 and credit reporting. So a Deed in Lieu is much faster.

I would be (am currently) insolvent. Both my current house and the rental house that I plan to do a deed in lieu of foreclosure are both upside down due to the market.

Is it true that I calculate my insolvency at the time immediately before the Cancellation of Debt (COD) occurs (IRS Pub 4681). Therefore since the house is going to be my loss creating an insolvent basis of approx $35,000-45,000 wouldn't that pretty much mean it zero's itself out as long as I don't have any other assets worth anything? Would I then fill out form 982? or to prove insolvency - do I have to file bankruptcy? Since the house will be sold by the Mortgage company, isn't what they receive a true market value. Wouldn't i use that amount to base the amount for the Debt and therefore be the same amount as the COD?

Thank you,

Jenelle

Let me give you an idea how insolvency works. You add up all your assets at fair market value, you subtract all of your debts, and the negative difference is the amount that you are insolvent.

So, if for some reason you are insolvent in the amount of 25,000 but your 1099C has an amount of 45,000, then you would still have 20,000 of taxable income. However, if the numbers are reversed, then there is no taxable income.

Yes, you have to fill out form 982, however its not as simple as that. You will also need to deal with potential capital gains and depreciation recapture, since this is rental property. I would really recommend that you use a tax professional this year, and one that is experienced in dealing with both 1099As and 1099Cs. Its not a simple situation and its very easy to make a mistake.

[jenelle0110]

one question that wasn't answered was "do I need to file bankruptcy in order to be insolvent" I think I already figured out that, no I don't - can someone confirm.

other question that wasn't quite clear was "do I get to count the negative market value of the property I am going to give back to the bank" I believe this to be true since according to the code, it says to figure the amount of insolvency just prior to the cancellation of of debt, so I would include the amount of how negative that property was at the time the bank sold it. can someone confirm this?

With my current home worth only 16o-170K with a 205K mortgage thats 35 to 40K negative in addition to the above and I don't have any other assets that are worth more than $5K total beyond that, just more debt on top.

as far as gains, I only had the property rented for 1 year and took depreciation of at most 5K last year (will need to look, but I know I am close) , again still not much when you add everything up. I am not too worried about the recapture amount, since its only 1 years worth.

I may have someone do my taxes, but I typically I do them myself (I tend to have plenty of time to do them and take my time), I used to have an S-Corp and that is now gone, which I did my own taxes then, which this now in my mind simplifies this for me.

[LdiJ]

one question that wasn't answered was "do I need to file bankruptcy in order to be insolvent" I think I already figured out that, no I don't - can someone confirm.

other question that wasn't quite clear was "do I get to count the negative market value of the property I am going to give back to the bank" I believe this to be true since according to the code, it says to figure the amount of insolvency just prior to the cancellation of of debt, so I would include the amount of how negative that property was at the time the bank sold it. can someone confirm this?

With my current home worth only 16o-170K with a 205K mortgage thats 35 to 40K negative in addition to the above and I don't have any other assets that are worth more than $5K total beyond that, just more debt on top.

as far as gains, I only had the property rented for 1 year and took depreciation of at most 5K last year (will need to look, but I know I am close) , again still not much when you add everything up. I am not too worried about the recapture amount, since its only 1 years worth.

I may have someone do my taxes, but I typically I do them myself (I tend to have plenty of time to do them and take my time), I used to have an S-Corp and that is now gone, which I did my own taxes then, which this now in my mind simplifies this for me.

You are correct in both of the first two items.

However, unfortunately you may have a capital gain. When you give them the deed, it counts as as sale. The amount that you "realize" from the sale is the balance due on the mortgage. Your cost basis is the amount you paid for the property minus depreciation, taken or allowable, plus any improvements you made. If your cost basis is less than the loan balance, then you could have a capital gain, and depreciation recapture. If your cost basis is higher than the loan balance, you may have a capital loss (because it was rental property).

[jenelle0110]

OK - when I give them the deed and it counts as a sale, isn't the sale amount the same as the mortgage balance? Then why are they talking about issuing a 1099C?