Odd Situation

[LdiJ]

What is the name of your state (only U.S. law)? IN

I mentioned this case a while back but further developments have happened.

A friend of mine got a very simple letter from her mortgage company last spring telling her to stop paying her mortgage...that they were making no further claims against her home. She was underwater on the mortgage. There was no telephone number to call, and no street address to write to. I had never heard of that happening and therefore I asked if anyone else had.

The latest development is that she received a 1099-C for the balance due on the mortgage.

Now, this home is her principal residence therefore the Mortgage Debt Forgiveness Act of 2007 would apply. However, the intent of that act was to give relief to people who had lost their homes to foreclosure, not for people who basically were given a gift of the home by the mortgage company (although the house is in somewhat poor condition).

I cannot find any precedent for this anywhere. Has anyone run into this kind of scenario at all?

 

[BigMouthWino]

If she can prove that the income from the 1099=C makes her insolvent then she won't have to pay taxes on it.

 

[Zigner]

If she can prove that the income from the 1099=C makes her insolvent then she won't have to pay taxes on it.

Of course, that has nothing to do with the question asked

 

[tranquility]

Restructuring the loan is envisioned by the act as well. Since the house is kept, there is one more line on the 982 to fill out.

 

[LdiJ]

Restructuring the loan is envisioned by the act as well. Since the house is kept, there is one more line on the 982 to fill out.

I am aware that more needs to be filled out on form 982. So, you feel that this is ok as a restructure? Have you seen any case law on anything remotely similar? I haven't been able to find anything.

 

[LdiJ]

Of course, that has nothing to do with the question asked

Nor can "income" make someone insolvent...

 

[tranquility]

I am aware that more needs to be filled out on form 982. So, you feel that this is ok as a restructure? Have you seen any case law on anything remotely similar? I haven't been able to find anything.

What else could you call it? The facts fit the statute. Why not use it? It reduces the basis, but, who cares?

The only possible fly might be:

‘‘(3) E XCEPTION FOR CERTAIN DISCHARGES NOT RELATED TO
TAXPAYER ’ S FINANCIAL CONDITION .—Subsection (a)(1)(E) shall
not apply to the discharge of a loan if the discharge is on
account of services performed for the lender or any other factor
not directly related to a decline in the value of the residence
or to the financial condition of the taxpayer.

 

[LdiJ]

What else could you call it? The facts fit the statute. Why not use it? It reduces the basis, but, who cares?

The only possible fly might be:

Ok then. I have done all the research I can...nobody else in my office can find anything that I haven't found and an outsider I respect agrees.

 

[davew128]

Of course, that has nothing to do with the question asked

No it doesn't but I actually think it relevant in this case. Thats more accidental on his part than intentional. Okay COMPLETELY accidental.

 

[LdiJ]

no it doesn't but i actually think it relevant in this case. Thats more accidental on his part than intentional. Okay completely accidental.

lol**************

 

[davew128]

LdiJ, was your client underwater on the mortgage? Tranq's posting of (H)(3) is pretty important because if this was simply a gift by the bank (whomever heard of such a thing?) then this isn't exclusion of principal residence indebtedness for this purpose and we go back to the general rules to exclude COD such as (dare I credit Wino?) insolvency.

 

[LdiJ]

LdiJ, was your client underwater on the mortgage? Tranq's posting of (H)(3) is pretty important because if this was simply a gift by the bank (whomever heard of such a thing?) then this isn't exclusion of principal residence indebtedness for this purpose and we go back to the general rules to exclude COD such as (dare I credit Wino?) insolvency.

Yes, she was underwater on the mortgage. However, I think that this was very much due to the decline of the value of the home AND the financial condition of the taxpayer.

She had tried for a modification a few years back and was denied, and was somewhat spotty in making her mortgage payments on time since then...not massively late, but sometimes late. I do believe that she had an unpaid balance before the modification attempt and never resolved that. I agree that insolvency is another option for her, but mortgage debt relief is a lot cleaner. Our office has seen a lot of mini-audits on insolvency exclusions. We haven't lost any but they panic the taxpayers for several months until its resolved.

 

[davew128]

Well you CAN elect to take the insolvency route instead of the principal residence route. Just a thought in case that provides a better result in certain respects.

 

[BigMouthWino]

Of course, that has nothing to do with the question asked

Sure it doesn't, that's why despite it being proffered in post #2 in this thread it took all of you brainiacs posting nonsense back and forth until post #13 to figure out the same darn thing.

Moral of the story: Never doubt BigMouthWino

 

[davew128]

Sure it doesn't, that's why despite it being proffered in post #2 in this thread it took all of you brainiacs posting nonsense back and forth until post #13 to figure out the same darn thing.

Moral of the story: Never doubt BigMouthWino

Well, no not quite. Insolvency doesn't automatically apply here. The law is quite clear that principal residency takes priority over insolvency in applying exemption from income. One has to elect otherwise, and you would have to have a very fact specific reason to do so, which wouldn't necessarily make sense here. The collateral consequences for choosing insolvency over principal residence are VERY different and generally NOT advantageous.