Discussion:Foreclosure and subsequent auction that spans 2 years - no 1099A or 1099C

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Discussion Forum Index --> Basic Tax Questions --> Foreclosure and subsequent auction that spans 2 years - no 1099A or 1099C


Discussion Forum Index --> Tax Questions --> Foreclosure and subsequent auction that spans 2 years - no 1099A or 1099C

Jossiecpa (talk|edits) said:

10 August 2011
Client had property foreclosed on in 2010 and auctioned off in 2011. There were 2 mortgages on the property, both secured by the property. Fannie Mae "bought" the property in 2011 - they bid the full debt amount at the auction - and waived any of the client's personal liability for any deficiency on both mortgages. No 1099A or 1099C was issued to client in 2010 for the foreclosure. This was an investment property. Will the selling price of the property be the amount of both of the loans that was outstanding on the date of the "sale"?

Also, one foreclosure notice was recorded with the county in 2009, the other was recorded with the county in 2010. The Judgement of Foreclosure and Sale was entered in 2010. The auction and "sale" to Fannie Mae occured in 2011. Which year will this sale be reported on the tax return of the client? The client was in communication with Fannie Mae and his attorney in 2011, with regard to negotiations over whether or not he would continue to have personal liability for outstanding debts, until the date of the sale in 2011.

Any help would be appreciated. Thanks!

EZTAX (talk|edits) said:

11 August 2011
Did Fannie Mae hold both mortgages?

DaveFogel (talk|edits) said:

11 August 2011
My understanding is that a foreclosure in Illinois is accomplished by the judicial foreclosure process, meaning that it starts with a complaint filed by the lender in court. A judgment of foreclosure can be obtained in as little as 90 days. However, due to the statutory redemption period, the Sheriff’s sale of the property (the auction) might not occur for several months after the judgment of foreclosure is entered, and the court might extend this period in certain cases. As a result, the complaint might be filed with the court in one year, the judgment of foreclosure might be entered in a later year, and the property might be auctioned off in a third year.

You said that one foreclosure notice was recorded with the county in 2009, but you don’t describe this notice. This might be the Complaint to Foreclose Mortgage that was filed with the court that began the foreclosure process. The disposition of the property must be reported on your client's return for the year in which he lost the burdens and benefits of ownership, and this might be the year in which title was transferred, or an earlier year if he abandoned the property. I can’t tell from the information you provided whether this was 2010 or 2011. It probably wasn’t 2009, which is when it looks like the foreclosure process was just beginning.

If your client lost the burdens and benefits of ownership in 2010, and after the property was sold at auction to Fannie Mae in 2011, Fannie Mae decided to waive the deficiency, then you’ll have to report the disposition of the property in 2010, and cancellation of debt income (COD income), if any, in 2011.

My understanding is that the loans in Illinois are all recourse loans, which means that the foreclosure is split into two parts consisting of (1) gain or loss on the disposition equal to the FMV of the property minus its adjusted basis, and (2) ordinary income (COD income) equal to the unpaid debt minus the property’s FMV. See Frazier v. Commissioner, 111 T.C. 243 (1998); Treas. Reg. §1.1001-2(a)(2); Example (8) at Treas. Reg. §1.1001-2(c); Rev. Rul. 90-16, 1990-1 C.B. 12.

The COD income might be excludable if one of the exclusions in Sec. 108 applies.

Okie1tax (talk|edits) said:

11 August 2011
Dave, thank you for this concise explanation of the foreclosure process. It makes it so much easier to understand a lot of the discussions that have taken place about this issue, now.

Jossiecpa (talk|edits) said:

12 August 2011
Thank you Dave. That was excellent information. Based on the court documents, the property was to be auctioned in December 2010. It didn't sell, and then Fannie Mae took it over in March of 2011. I would suppose that he lost the benefits of ownership in 2010 since it was going to be sold from under him. He had stopped making any mortgage and property tax payments in the beginning of 2010. Apparently there were unknown flaws with the property when he bought it, and when he went to make some repairs, he opened Pandora's box (wonder what happened to his inspector . . .). He didn't have the $ to fix it, so he just stopped making payments - the value of the home had decreased dramatically during that time and he decided not to throw good money after bad. He bought it for $250,000 and it's now on the market for $48,000.

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