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Short Sale taxes on Deficit amount


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10 replies to this topic

#1 whoarethemachines?

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Posted 30 November 2011 - 02:34 PM

So my parents own a house in which my brother lives.
My brother was supposed to pay the mortgage and hasn't done so in probably over a year.

That house is now days away from a short sale. We're expecting the closing day to be announced any day now.

The short amount is about $200k.
I understand that my parents may have a tax liability because it is not their primary residence. They live somewhere else and have been doing so for at least 10 yrs.

My brother's accountant is telling my parents that he will take care of filling out the 1099-c.
First ? - Wouldn't the 1099c get filled out by the bank, one copy go to the IRS and another to my parents?

The accountant is also telling my parents that whether or not they pay tax on the short amount depends on how the 1099-c is filled out. Apparently simply checking off a particular box could mean no tax is owed.
2nd ? - is that correct?

TIA.



#2 NurseJackie

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Posted 01 December 2011 - 01:27 PM

When we SS our home last year we received the 1099c from the bank so I'm not sure what the accountant is talking about.





#3 radi8

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Posted 05 December 2011 - 12:45 AM

1099 is created by the party "forgiving" part of the debt. That would be the lender. If the recipient is insolvent at the time- liabilities exceed assets- there is no tax consequence. The IRS has a worksheet to complete for that purpose.

#4 SparkyinCA

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Posted 05 December 2011 - 01:09 AM

1099 is created by the party "forgiving" part of the debt. That would be the lender. If the recipient is insolvent at the time- liabilities exceed assets- there is no tax consequence. The IRS has a worksheet to complete for that purpose.


This is correct. I just filled the worksheet you mentioned last week with my tax preparer during a tax planning session for this same problem so I wouldn't have a big surprise come April 2012 with the IRS and State taxes. You have to list assets and liabilities based on the day before the SS escrow closed. I ended up insolvent so no tax on my $400,000 deficit on the SS (whew!). However, if your assets (which included the value of the property just before closing) goes over the SS amount, then you just pay taxes on the difference between the two. I do have to pay capital gains tax though (over $26k between Fed and State since the property was deemed business property (no home on it - it was farm land here in CA).

#5 SparkyinCA

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Posted 05 December 2011 - 01:30 AM

So my parents own a house in which my brother lives.
My brother was supposed to pay the mortgage and hasn't done so in probably over a year.

That house is now days away from a short sale. We're expecting the closing day to be announced any day now.

The short amount is about $200k.
I understand that my parents may have a tax liability because it is not their primary residence. They live somewhere else and have been doing so for at least 10 yrs.

My brother's accountant is telling my parents that he will take care of filling out the 1099-c.
First ? - Wouldn't the 1099c get filled out by the bank, one copy go to the IRS and another to my parents?

The accountant is also telling my parents that whether or not they pay tax on the short amount depends on how the 1099-c is filled out. Apparently simply checking off a particular box could mean no tax is owed.
2nd ? - is that correct?

TIA.



I think this might be in reference to the escrow closing package your parents have to fill out with the Title Company just before they close escrow on the Short Sale. I had to fill out a form where you check whether or not you expect to owe taxes due to the sale so the Title company (may) request the tax be paid at close of escrow or they won't let the escrow close. If you check off the wrong box, it's a problem, so maybe that's what the accountant is referring to fill out. Yes, you'll get a 1099 C from the Lender at some point (probably by the end of January 2012) but the taxes are dealt with when the proceeds of the sale are being handled in escrow. The IRS doesn't like to wait for their money. This is how it's done here in CA, so I don't know your state, but a call to the Title/Escrow Office would be your best bet to clarify this how to fill out this 1099 C worksheet that is filled out before close of escrow so the title company knows whether or not to withhold the taxes from the proceeds of the sale.

Hope this helps. I just went through this a few months ago on a short sale as the seller.



#6 SparkyinCA

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Posted 06 December 2011 - 02:19 PM

^^bump^^

#7 SparkyinCA

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Posted 08 December 2011 - 07:54 PM

Is there an update on this???

#8 whoarethemachines?

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Posted 11 December 2011 - 10:30 AM

Yes, here's an update. Sorry bout being MIA, been a little tied up w/ Life :-)

At this time my father is trying to work w/ 2 accountants.
His usual guy who is out of town until the end of the year.
As a result of his absence my brother got my father in touch w/ his accountant. This one's wife is in stage 4 cancer so he hasn't be readily available and we're not (understandably) pushing him.

My goal was to sit down for a planning session to avoid surprises as a previous poster mentioned.
The info provided here has been the most concise.

As for possible insolvency.
I'm expecting that might not be the case since this property is about $200k in the hole but my parents have their primary residence w/ no mortgage.
At worst this one is probably valued at a little more than $200k. At best it's a little more than $300k.
Then if you include cash equivalents and other retirement accounts, they're probably over.

#9 whoarethemachines?

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Posted 11 December 2011 - 10:37 AM

I think this might be in reference to the escrow closing package your parents have to fill out with the Title Company just before they close escrow on the Short Sale. I had to fill out a form where you check whether or not you expect to owe taxes due to the sale so the Title company (may) request the tax be paid at close of escrow or they won't let the escrow close. If you check off the wrong box, it's a problem, so maybe that's what the accountant is referring to fill out.


Well, If I were to formally go through the process of determining whether or not taxes are expected to be paid, I might say yes they are to be paid.
By Formally, I mean using a work sheet and determining insolvency.
But if the form just expects me to give my best guess,
why would I say yes?
In other words, if someone were to ask me that question while sitting across a table. I'm going to say NO.

Now, if at closing we are asked to take some time to fill out a form, then I'll go through the details.

#10 whoarethemachines?

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Posted 11 December 2011 - 10:44 AM

BTW.
This is in NY and the closing is scheduled for Mon 12/12.


It's amazing how stressful this process has been for everyone involved.
Every step of the way, my brother has been completely useless.
We were supposed to close on Fri but he was unable to get all his stuff out of the house in time. A couple of weeks ago his wife even threatened to squat on the property.

The excuses he gave for not being able to do the things that were expected of him and that everyone but (my mother and) I accepted as valid reasons were just mind boggling.
Sorry, just had to vent a little.

#11 SparkyinCA

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Posted 11 December 2011 - 01:34 PM

Appreciate the update. Keep us posted how the closing goes. Each state is different how they handle things. The worksheet I was sent via mail prior to closing from the title company included IRS applicable worksheets to see if there "might" be taxes due. Based on that, you fill out the title companies sheets on which box to check (tax or no tax). Took me a few tries, but I ended up checking the no taxes owed. After the tax planning session there is clearly taxes owed, but I'm not an accountant and did not have the luxury of time to get the tax planners input (took over a month to get the final figures since they are only open one day a week this time of year). There was no way I would have known at the time how much principal and interest would be on the loan that was being paid off until a few months after the loan was paid off. Of course the interest deduction on the loan affects the bottom line on taxes.

I also would rather pay the penalty with the IRS than to send them $XX,XXX nearly a year in advance only to find out I didn't have to pay that in the first place. It's a real catch 22. I did it the right way, and will work with the IRS on a 3 year payment plan when I file my taxes in April if I can't pay the full amount at once.

The important thing is to get the SS done and over with. The situation your family is in is stressful. That is worth something to resolve NOW and the taxes can be worked out later. Your family is not the first one's to deal with a short sale in this economy, so they are pretty understanding why the property needed to be sold and in a timely manner.

Good luck to you whoarethemachines!




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