Help with Form 1099-A

[LdiJ]

I disagree wih LdiJ that you do "nothing" with the Form 1099-A. The foreclosure acts as a sale of the home, on which you realized either a gain or (more likely) a loss. So you report the gain or loss on the sale of the home as if you'd sold it yourself, using the figures from the Form 1099-A. I assume the lender only gave you credit on the loan for the $74k market value it put on the Form 1099-A, which means that is the amount realized in the sale. Your gain or loss is determined by subtracting your adjusted basis from that amount. If you have a loss and this was your personal residence that loss is not deductible. But at least you'd have no tax due on the home.

If the remaining debt from the loan after the foreclosure was canceled/forgiven then the amount that is forgiven/discharged is taxable income to you unless an exception applies. LdiJ mentioned the two most common exceptions: the one for discharge of debt on a personal residence and the insolvency exception. The lender is supposed to send you a Form 1099-C when that happens. If you didn't get a Form 1099-C but know for certain that the lender discharged the remaining debt, you still need to report that discharge. Otherwise, you wait to see if you get the Form 1099-C before dealing with that part of it.

See IRS publication 4681 for all the details of reporting a foreclosure.

I disagree that the "sale" of the home should be reported as a gain or loss if this was their personal residence. I was under the assumption from his wording, that it was his personal residence. I would agree that one would report the "sale" of the residence if it were a rental property or an investment property.

 

[Taxing Matters]

I disagree that the "sale" of the home should be reported as a gain or loss if this was their personal residence.

Reread what I wrote: "So you report the gain or loss on the sale of the home as if you'd sold it yourself, using the figures from the Form 1099-A." What I wrote was quite true: it ends up being treated the same way as if the OP had sold the property himself/herself. If it was not his/her personal residence then there is gain or loss to report. If it was his/her personal residence and there was a gain, that too should be reported in the same instances any such sale must be reported. Your statement above suggests that sales of personal residences need never be reported, and that is obviously wrong. There are instances when the gain on a sale of a personal residence must be reported. First, of course, is when the gain is taxable. Even when the gain is not taxable there are instances when it must be reported. See IRS Publication 523 starting at the bottom of page 16. We don't have all the facts to know exactly what gain or loss the OP has and what reporting is needed. Thus, I believe you were wrong to tell the OP that he or she needs to do "nothing". He or she may indeed have to do something. You made a lot of assumptions in reaching that conclusion that may or may not turn out to be correct. I trust when preparing returns for clients you don't fall into that trap of making simple assumptions based on what happens in most of the foreclosures out there. Not everyone falls into the same situation. You need to verify the exact facts in each case and not assume them.

 

[LdiJ]

Reread what I wrote: "So you report the gain or loss on the sale of the home as if you'd sold it yourself, using the figures from the Form 1099-A." What I wrote was quite true: it ends up being treated the same way as if the OP had sold the property himself/herself. If it was not his/her personal residence then there is gain or loss to report. If it was his/her personal residence and there was a gain, that too should be reported in the same instances any such sale must be reported. Your statement above suggests that sales of personal residences need never be reported, and that is obviously wrong. There are instances when the gain on a sale of a personal residence must be reported. First, of course, is when the gain is taxable. Even when the gain is not taxable there are instances when it must be reported. See IRS Publication 523 starting at the bottom of page 16. We don't have all the facts to know exactly what gain or loss the OP has and what reporting is needed. Thus, I believe you were wrong to tell the OP that he or she needs to do "nothing". He or she may indeed have to do something. You made a lot of assumptions in reaching that conclusion that may or may not turn out to be correct. I trust when preparing returns for clients you don't fall into that trap of making simple assumptions based on what happens in most of the foreclosures out there. Not everyone falls into the same situation. You need to verify the exact facts in each case and not assume them.

I find that reply to be a little offensive. However, I also find it to be typical of the rare occasions when I disagree with you. The OP can certainly consult with a tax professional of their own.

 

[Taxing Matters]

I find that reply to be a little offensive.

Offensive how? I said that I trust — that is I'm giving you the benefit of the doubt — that you don't make such assumptions when doing returns for clients. I wasn't trying to slam you at all. But you made assumptions in this thread in arriving at a conclusion that the OP need do "nothing". We don't have all the facts to really know that. Do you disagree with that? If so, please explain why. Otherwise, I hope you understand where I'm coming from. It's not helpful to the OP to say he/she needs to do nothing when you haven't explained the assumptions that underlies that conclusion. He or she may end up doing nothing based on what you said and then, if your assumption turns out wrong, he or she may end up in a mess. The assumptions might even be correct much of the time, but should they not turn out right, the people relying on them may run into problems.

I get frustrated with return preparers who simply assume things that then later turn out to be wrong, which then generates problems for their clients that I then end up having to fix. While I suppose you could say its great that I get extra work, I'd rather not have to clean up after those return preparers' mistakes. Although most preparers might not make those kinds of assumptions, there is nevertheless still too much of it from my perspective. Let me give you an example of one of the common ones that I see. Preparers often seem to assume that all their clients are U.S. citizens or residents and so they don't bother asking the question of every client. Certainly for the vast majority of clients assuming that will turn out to be correct. But not always. And obviously, that can make a big difference in the tax treatment for the client if they get it wrong.

Right now I'm dealing with another assumption that a tax preparer made that turned out not to be correct. He assumed that the dividend income the client was receiving came from a U.S. corporation (this despite the fact that company had a Spanish name). As a result, he totally missed that it was controlled foreign corporation (CFC) and ended up not advising the client of the need for filing Forms 5471 and also missed FATCA filings as well -- didn't notice that the dividends were going into a foreign account controlled by the client. Now the client is facing large 5471 and FATCA penalties as a result. If we can't get the penalties abated we'll end up suing the preparer for negligence.

Now let me be clear that I'm not saying or implying that you make those kind of assumptions when you do returns for clients. But I wanted to explain the frustration behind what you apparently saw as a sharp reply.

 

[LdiJ]

Offensive how? I said that I trust — that is I'm giving you the benefit of the doubt — that you don't make such assumptions when doing returns for clients. I wasn't trying to slam you at all. But you made assumptions in this thread in arriving at a conclusion that the OP need do "nothing". We don't have all the facts to really know that. Do you disagree with that? If so, please explain why. Otherwise, I hope you understand where I'm coming from. It's not helpful to the OP to say he/she needs to do nothing when you haven't explained the assumptions that underlies that conclusion. He or she may end up doing nothing based on what you said and then, if your assumption turns out wrong, he or she may end up in a mess. The assumptions might even be correct much of the time, but should they not turn out right, the people relying on them may run into problems.

I concede that I did not ask if it was rental or investment property. You are correct, the tax treatment there is different than a primary residence.

I get frustrated with return preparers who simply assume things that then later turn out to be wrong, which then generates problems for their clients that I then end up having to fix. While I suppose you could say its great that I get extra work, I'd rather not have to clean up after those return preparers' mistakes. Although most preparers might not make those kinds of assumptions, there is nevertheless still too much of it from my perspective. Let me give you an example of one of the common ones that I see. Preparers often seem to assume that all their clients are U.S. citizens or residents and so they don't bother asking the question of every client. Certainly for the vast majority of clients assuming that will turn out to be correct. But not always. And obviously, that can make a big difference in the tax treatment for the client if they get it wrong.

I totally get your frustration with cleaning up messes made by tax preparers. I spend a great deal of my off season doing just that myself and it can be really frustrating. The only upside to it is that those people generally end up becoming my clients on a long term basis. I also spend a great deal of my off season cleaning up messes that people made themselves trying to file online.

Right now I'm dealing with another assumption that a tax preparer made that turned out not to be correct. He assumed that the dividend income the client was receiving came from a U.S. corporation (this despite the fact that company had a Spanish name). As a result, he totally missed that it was controlled foreign corporation (CFC) and ended up not advising the client of the need for filing Forms 5471 and also missed FATCA filings as well -- didn't notice that the dividends were going into a foreign account controlled by the client. Now the client is facing large 5471 and FATCA penalties as a result. If we can't get the penalties abated we'll end up suing the preparer for negligence.

Wow, that is one huge mess.

Now let me be clear that I'm not saying or implying that you make those kind of assumptions when you do returns for clients. But I wanted to explain the frustration behind what you apparently saw as a sharp reply.

Again, I understand your frustration and I concede that I made an assumption that it was his primary residence rather than a rental or investment property.