[rjaroh]

My mother passed away four years ago and we couldn't sell her house. We could not make the payments on it any more so we sent it into foreclosure. Why do we have to file a 1099c? The home was still in my mothers name. She bought the house for $118,000 and the bank sold it for $40,000. What tax implications are we looking at if any?

[AtlantaTaxExpert]

RUN, DON'T WALK to a local competent tax professional on this issue. The tax pro will need experience in BOTH income taxes AND estate taxes.

Based on your posted information, it appears that the house was still in the estate's name, and apparently the estate ran out of money to continue to make the mortgage payments. This being the case, the estate is responsible for paying the taxes on the imputed income as shown on the Form 1099C.

If that is the case, the Form 1099C has been mis-routed. Contact the title company and have them re-issue the Form 1099C to the estate, which SHOULD have its own EIN.

The complexity of this case demands that you get local professional tax help to resolve these issues.

If the estate in insolvent, then the taxes, though owed, will eventually be forgiven. The only way the IRS will go after the heirs is if the estate improperly distribute the estate's assets to the heirs before settling all the legitimate expenses and taxes.

[ebaines]

When your mother passed her house and other assets all became part of her estate. If at that time the value of her estate was negative - that is, the mortgage debt was greater than the value of the house plus all her other assets - the executor of her estate could have decided to walk away from the house and its debts at that time. But it sounds like the estate has since settled, so you inherited the house along with the mortgage. This means that when you stopped paying the mortgage it was you (not the estate) who defaulted. It appears that when the bank sold the house for $40K that this was less than the amount of the outstanding mortgage, and the bank has forgiven the difference - they have cancelled your debt. This debt cancellation is treated as income to you (forgiving a liability is like gaining an asset, so it counts as income). The 1099-C documents the difference between what they sold it for versus what you owed on it. By sending this to you the bank has essentially documented the amount of loss that they took on the property. You must report this as income on your taxes. HOWEVER, there are exceptions - for example if this was your principal residence or if you have declared bankruptcy. Here's a web site that explains how this works: The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

It would help if you would tell us the amounts that are reported on the 1099-C in boxes 2 and 7.

*EDIT - I totally agree with AtlantaTaxExperts advise about seeking professional counsel on this. My response is based on an assumption that the mother's estate has settled (since your mother passed 4 years ago this seems like a reasonable assumption). So clearly there are implications with respect to whether this "income" is yours versus the estate's. *

[AtlantaTaxExpert]

Good advice from ebaines if the executor allowed the house to be transferred to you with the mortgage.

Again, there are too many uncertainties to give proper advice; go find yourself a local, competent tax professional to help you with this problem.