Implications of ignoring a 1099-c

[Kansas4me]

What is the name of your state?ks

My friends had a house forclosed on in 2003. They received a 1099c this year but it was after they had already filed their taxes. She came to me to ask me what it was and what they were suppose to do with it. I looked it up and I gave her my opinion, but she wasn't real happy with it (you have to pay taxes on the cg on the house, but you should really see a tax accountant) Seems since I am less than a year away from my accounting degree I am always hit up for advice (now I know how doctors must feel)

So anyway, she decided to ignore it, jsut throw it away. Not good. Especially after I found out this:

They were deeded the house after his grandmother passed away. Paid in full, no lien, given the house. they took out a loan on it for 30,000 and had some siding put on and then paid off all their credit card debt. 6 months later they refinanced again for 75,000 and walked away with profits in pocket. If I understand right that means they had a gain of 75000 on the house since they paid NOTHING for it. She thinks it would only be figured on the 45000 diff from first loan to last one.

At any rate, I had been told (by a not all together great source) that you can write off your capital gains on a home ONCE in your life. Is that true, and if so how do you do it?

 

[Snipes5]

A 1099C is issued when debt is cancelled. Apparently the bank or mortgage company wrote of a portion of their loan, and that is why the 1099C was issued.

Cancelled Debt is treated as ordinary income. This is completely separate from the Capital Gains issue.

A 1099C is also filed with the IRS at the time of the cancellation, which means the IRS is aware of the income, and will expect to see it on your friends' tax return.

When it doesn't turn up, the IRS will be contacting them, probably sometime next year. The IRS will adjust their tax return and charge them penalties and interest on the unreported income.

Your friends are amazingly stupid, which I am sure they will figure out when the kimchee they are in catches up with them.

Snipes

 

[LdiJ]

A 1099C is issued when debt is cancelled. Apparently the bank or mortgage company wrote of a portion of their loan, and that is why the 1099C was issued.

Cancelled Debt is treated as ordinary income. This is completely separate from the Capital Gains issue.

A 1099C is also filed with the IRS at the time of the cancellation, which means the IRS is aware of the income, and will expect to see it on your friends' tax return.

When it doesn't turn up, the IRS will be contacting them, probably sometime next year. The IRS will adjust their tax return and charge them penalties and interest on the unreported income.

Your friends are amazingly stupid, which I am sure they will figure out when the kimchee they are in catches up with them.

Snipes

While I agree that they were amazingly stupid....I have to disagree with the fact that gains don't determine whether or not the amount on the 1099 C is taxable......BECAUSE they lost/gave up ownership of the home in the transaction.

Their basis on the home was its value when it was inherited. If the amount they recieved in loans was less than their basis then they have a non-deductable loss.

If the amount they recieved in loans was more than their basis then the difference between their basis and the loan amount would be taxable income.

I just spent several weeks researching just this issue. The amount listed on a 1099 C is fully taxable if no assets are given up in the transaction...however when they are, whether or not the amount on the 1099 c is taxable DOES depend entirely on whether or not there is any gain.

 

[Kansas4me]

So it doesn't matter what they paid for it ($0) it matters what it was worth at the time they inherited it?

I think it was in a rather rough area, so while it was a nice house it wouldn't have been worth much.

They also said they used part of the first refinancing to put on new siding, gutters, garage doors, and a few other things. Would this affect the loss/gain on the house?