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saverio · Feb 12, 2007, 02:43 PM

My wife and I had to forclose on our house at the end of last year. The foreclosure date was actually on the 29th of December, and the house did not sell at auction. I just received in the mail a 1099c from my lender for the entire amount of their loan, 400k. My understanding of how this works is that we would be responsible for any loss the lender would incur, so if they would sell it for 380k, we would be responsible to claim 20k in income to 'cover' the loss that they took. At this time, they still have control of the house and they are actively trying to sell it, but because it has not sold yet, they claim that the entire amount is a loss to them, regardless if they own the property or not. This is contrary to everything I've read or been lead to understand by our real estate agent, tax agent (who I have an appointment with next week, but wanted to see if I could get some answers here before then), and the lender themselves. Am I wrong? What if they sold the house today, in tax year 2007 and recovered their entire loan amount? How would that affect my taxes? Would I be forced to claim 400k in income then adjust it in 2007? It just doesn't make any sense that they have lost anything yet because they have the property. Have they made a mistake or is it my misunderstanding? Anyway, any comments or suggestions are welcome.

Sav

Foreclosure Truth · Feb 12, 2007, 09:46 PM

While laws vary by state, the following works in CA. I'm also assuming that when you say your house did sell at auction, you mean that it was put up for sale but a 3rd party did not bid on it. If that is the case the house essentially did sell back to the lender for the full loan amount. As such you received a 1099c for the full sale amount of your house, which is correct. You'd get the same thing if you sold your house yourself to a regular buyer.

The tax consequences of the sale depend on your cost basis in the house, again no different then if you sold the house yourself. Hope that helps.

saverio · Feb 12, 2007, 11:08 PM

Well, I still am having a bit of trouble understanding the concept a bit. What does it mean when you say it 'essentially'sells back to the lender. Doesn't the property have any value at all to them, in the sense that they shouldn't be taking a 400k loss? And what do you mean that we'd get the same thing if we sold our house ourselves... does that mean a 1099c would be involved even in that situation? Lastly, when you mention our cost basis in the house... what are you referring to there? I'm a pretty bright guy, but obviously ignorant with the tax laws involving this. Seems like I must just have a mental block about some aspect of it. I appreciate your response greatly, and hope you respond to this as well.

Foreclosure Truth · Feb 13, 2007, 10:52 PM

Again, based on CA law (though I'm not an attorney), may not apply elsewhere.

When no one bid at auction, the lender became the owner of the house. The amount they lent you for the house, then becomes the amount they paid for the house. As such, by letting it go to foreclosure, you essentially "sold" them the house for the amount of the loan.

When you sell a house it is standard to get a 1099 for the full amount of the sale. As such it has nothing to do with the loss your lender may take, if any, it only has to do with the fact that they spent $400k to buy your house.

Your "cost basis" is what you paid for the house, plus improvements you've made to it. If you paid $250k for the house, and put in a new kitchen for $25k, your "cost basis" would be $275k.

Your taxable gain on the house would then be $400k - $275k = $125k.

If you lived in the house as your personal residence for 2 of the last 5 years, you should pay no taxes on gains of up to $500k since you are married.

While I'm very sure that this is the situation in your case, I don't have all your information, so I'd still highly recommend you contact a competent tax advisor.

Bottom line, sleap easy, you should be fine.

Sorry my posts above may be mistaken. I re-read and you are saying you received a 1099c which is for cancellation of debt and is taxable as income.

This seems to me to be simply incorrect use of the 1099c form on behalf of your lender. You didn't mention the state your located in, nor do I have all the details of your particular transaction, so I really can't be sure.

Check out the following link:

Real estate/Tax lawyer's explanation of Foreclosure; Legal and Tax Consequences; Boston Harbor

Pay particular attention to the section on recourse loans and the mention of "relief from debt income". Relief from debt income is the only thing I believe you should receive a 1099c for and the link above does a good job of explaining when that applies - which I doubt it does for the full amount in your case.

Hope that helps,

saverio · Feb 13, 2007, 11:54 PM

Thank you, I do live in CA and thank you for your responses. Things are starting to look a bit clearer to me now, and the link you provided helped out a bunch. If I can run by one or two more things just to be sure I'm understanding right, I'd be grateful. My amount of loan forgiven was 400k. They put on the 1099c as fair market value for the house at 520k. I purchased the house for 490k (400k from 1st, 90k from 2nd). The way I'm understanding the link, I would have no relief from debt income because the house market value is worth more than the loan amount, but tax wise, It will be like I sold for a 30k profit (520-490=30). This is of course assuming that I will be receiving the same thing from my 2nd mortgage lender for their relieved debt. Anyway, my biggest fear was that I would be taxed for 400k as income which would be ridiculous. At least I feel now that it won't be for the entire amount, or it was a mis-use of the form as you mentioned. Again, thank you for your replies.

Foreclosure Truth · Feb 14, 2007, 01:32 AM

More importantly you would have no relief from debt income because these would be "purchase money", "non-recourse" loans.

The following sentence from the wwlaw link is the key "the property is taxed as if it were sold for the total outstanding amount of the loan (or sales price, if higher)". In your case it appears the 1st mortgage went to foreclosure, and since no one bid, the property is taxed as if it were sold for the total outstanding amount of that 1st mortgage, ($400k).

The $520k FMV on the tax form should be irrelevant, in fact I'd argue that the FMV was $400k at the time of sale, because if it were worth more than someone would have bought it at the auction (I believe there is case law to support this, but again I'm not an attorney).

As such you actually saw a $90k loss on the property rather than a $30k gain, but it doesn't matter as it is not tax deductible as it was your primary residence.

Still, please do consult with an accountant or lawyer before filing your return.

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