Discussion:Cancelled Debt Income from Voluntary Foreclosure

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Discussion Forum Index --> Tax Questions --> Cancelled Debt Income from Voluntary Foreclosure


Gmikeg (talk|edits) said:

10 November 2006
Is Cancelled Debt Income from Voluntary Foreclosure still taxable? My clients purchased a condo fully leveraged by a loan from a property management Co., voluntarily foreclosed, paid the interest on $10,271, gave up the property, and in the end never benefitted from the cancelled debt. No money and no property. They got a 1099-C for the $10,271. Is this right?

Thanks to all,

Mike Gray

Bottom Line (talk|edits) said:

10 November 2006
Am I correct in understanding that your clients paid $10,271 in interest and then received a 1099-C for the exact amount that they paid? Did they only pay a portion of the interest?

Gmikeg (talk|edits) said:

10 November 2006
Also, I got this from Kleinrock.

I need to find the code and see if I can apply it to this situation.

"If a debtor transfers property subject to recourse debt in satisfaction of the debt, however, there is discharge of indebtedness income if the face amount of debt exceeds the fair market value of the property transferred."

Gmikeg (talk|edits) said:

10 November 2006
Bottom Line, The interest ON the $10,271.

Mike

Dennis (talk|edits) said:

10 November 2006
If the difference between mortgage debt and value of property relinquished is $10,271 then client is clearly better off paying tax on income than selling house and paying out of pocket. I vote income. ♫

Solomon (talk|edits) said:

10 November 2006
IRS

Gmikeg (talk|edits) said:

10 November 2006
Thank you, Here are the numbers from the 1099-C:

Box 2 : Amount of debt cancelled: $10,271 Box 7 : Fair market value of property: $12,900

There is NO taxable income. (Am I reading this correctly)?

I'm pretty sure this would be the authority: TR 1.1001-2(a)(2)

Your help is greatly appreciated!

Mike

Riley2 (talk|edits) said:

11 November 2006
If you are saying that $10,271 was the total principal balance due, then the box 2 amount is incorrect. The box 2 amount should not include any amount satisfied by foreclosure or deed in lieu of foreclosure. This is a common error made by many mortgage companies.

The regulations section that you are citing merely states that the amount realized from the sale of the property does not include any amount properly includible as COD income (cancellation of debt income).

If $10,271 was the total principal balance due, then there appears to be no COD income; however, there may be a gain or loss on surrender.

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