Discussion:Form 982 with Form 1041

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Advanced Tax Questions --> Form 982 with Form 1041


Discussion Forum Index --> Tax Questions --> Form 982 with Form 1041

Ss-cpa (talk|edits) said:

24 September 2010
A taxpayer passed away in 2007 and his estate was created. His condo was sold in 2010 and the estate was subsequently closed. The estate attorney determined that the loan was recourse and because of that there is cancellation of debt (COD) income. My question is this: Is there any problem with attaching a Form 982 to a Form 1041, excluding COD income for qualified principal residence indebtedness?

R2 (talk|edits) said:

26 September 2010
3 years after death?

DaveFogel (talk|edits) said:

26 September 2010
I can't locate the discussion, but someone on this board previously said that an estate cannot claim the principal residence exclusion of IRC §§108(a)(1)(E) and 108(h) because an estate cannot have a principal residence, and I agree with this statement.

Dennis (talk|edits) said:

26 September 2010
Pretty much. For confirmation you can look to the application of the §121 exclusion specific to a situation in which sale had been effected by the decedent and executor's completion was ministerial. On the other hand, I find it strange for an attorney to determine a debt recourse and not pay it.

Ss-cpa (talk|edits) said:

26 September 2010
There was about $20,000 in specific bequests after everything was settled with no residual estate. This $20,000 has already been paid out. Although the bank did not require the $20,000 to be turned over to them as a result of the mortgage loan being recourse, I gather the mortgage loan can still be recourse by the way it is written. The bank may not have wanted to incur the cost of enforcing it. I would like to treat the loan as non-recourse to avoid this COD income issue. To answer R2's question, the condo was sold within three years of death. Would that possibly enable the estate to use the principal residence exclusion? I am sort of grasping at straws. If the estate cannot use the principal residence exclusion, then the next exclusion is insolvency. This will take care of all but the $20,000 of COD income. This results in roughly $5,000 in federal and state tax that cannot be paid by the estate at this point as the funds have been distributed. Another follow-up question: would it be possible to allocate the $20,000 of the estate to the beneficiaries of the specific bequests? The estate also has capital loss carryovers (CLC) of roughly $16,000. As I understand under the insolvency exception, these CLCs would be consumed by the debt forgiven since approximately $50,000 was forgiven total. This would be done before the basis of the condo could be reduced. I am looking for some legitimate way to make this principal residence exception stick, if not, I need to get the beneficiaries to pay the tax if possible under the insolvency exception with no help from the CLCs. Thoughts?

Ss-cpa (talk|edits) said:

26 September 2010
The condo was purchased on 9/2/05 for $152,000 and sold on 4/23/10 for $88,000. The mortgage upon sale is $137,000. The date of death is 7/14/07. These are rounded numbers. There is a significant period of time from date of death to date of sale, but not over three years. There was no material use of the condo from date of death. The COD income was closer to $55,000.

Ss-cpa (talk|edits) said:

26 September 2010
I think 121 can be satisfied even though the decedent owned the property less than two years before the date of death. If 121 can be satisfied, then would that be arguable that the principal residence exception is still valid?

Dennis (talk|edits) said:

26 September 2010
There are all sorts of possibilities including seeking the tax payable from whomever authorized distributions from money the estate apparently did not have. Let the attorney make the decision. With "no material use" (whatever that means) there is no possibility for the application of §121.

Ss-cpa (talk|edits) said:

26 September 2010
"no material use" - I meant the condo was just held by the estate as investment and was not rented.

Ss-cpa (talk|edits) said:

26 September 2010
Dennis, were you saying by your statement on "no material use" that if the property was used for something else that it would disqualify it for 121? I want to make sure I understood what you meant.

Dennis (talk|edits) said:

26 September 2010
Any application of §121 would have to be as a personal residence for a beneficiary. Give us a break here. Are we expected to believe mortgage default was immediate on death; that real estate taxes and condo fees went unpaid from that point; and that neither the county, the condo association nor the bank did anything until foreclosure three years later? More likely is fiduciary mismanagement and beneficiary vacations.

Ss-cpa (talk|edits) said:

27 September 2010
I just spoke with the executrix. She said the attorney advised her to stop paying the mortgage in December, 08. They were trying to do a short sale. Everything else was paid.

Ss-cpa (talk|edits) said:

27 September 2010
The executrix said that the bank forgave the rest of the mortgage and did not seek any other assets.

Ss-cpa (talk|edits) said:

27 September 2010
As I understand, 121(d)(11) would have helped in this situation, but for the fact that he passed away before 1/1/10. That being the case, since the sale was not initiated by the decedent prior to his death by the decedent, then the 121 exclusion cannot apply. Am I correct?

Dennis (talk|edits) said:

27 September 2010
Perhaps the attorney can make a case for assigning the COD to the specific bequests. (So long as they were the only ones who got anything.) You cannot and doing so is hardly fair. A better case can be made for assigning the COD income to the residual beneficiaries. They were the ones who had the benefit. Basically the executrix has made some bad decisions. I suspect the attorney directed the payment of the specific bequests because otherwise she would have been personally liable. (The money was there, she did something else with it.)

Ss-cpa (talk|edits) said:

27 September 2010
There were no residual beneficiaries, only the specific bequests.

DaveFogel (talk|edits) said:

27 September 2010
"I would like to treat the loan as non-recourse to avoid this COD income issue."

You can't simply "treat" the loan as nonrecourse. It was either recourse or nonrecourse, and that depends upon state law and the language of the loan documents. And you can't solve this particular tax problem until you determine whether the loan was recourse or nonrecourse.

Dennis (talk|edits) said:

27 September 2010
There were no residual beneficiaries, only the specific bequests. There may have been no residual estate left to distribute, however there were most certainly those who would have received something if it had been there...♫

Ss-cpa (talk|edits) said:

27 September 2010
DaveFogel, I agree. Not being an attorney myself, I can't make the determination if the loan is recourse or non-recourse. I found a web site that said that our state, Georgia was a walk-away state. http://www.mortgagereliefformula.com/recourse/ Of course, this means nothing. I showed this to the attorney and he is backing off his original opinion of the loan being recourse. I am also seeking other legal advice on this issue.

Dennis, you said, "Perhaps the attorney can make a case for assigning the COD to the specific bequests. (So long as they were the only ones who got anything.) You cannot and doing so is hardly fair. A better case can be made for assigning the COD income to the residual beneficiaries. They were the ones who had the benefit." and "There may have been no residual estate left to distribute, however there were most certainly those who would have received something if it had been there...♫ "

I think what you are saying is that it is not so easy to come back after the fact and allocate income to the individuals who received specific bequests, or to the residual beneficiaries, who never received anything, which leaves the executrix responsible. As you stated and I agree, I will not have the authority to make that decision to allocate income to the recipients of specific bequests.

R2 (talk|edits) said:

27 September 2010
I believe that deficiency judgements are allowed in Georgia.

Have you tried to use the insolvency exclusion?

Ss-cpa (talk|edits) said:

27 September 2010
Well, that is the next second-best alternative, resulting in some of the COD reported - around $20,000. Both Federal and State tax is roughly $4,700.

Ss-cpa (talk|edits) said:

27 September 2010
Didn't mean to say alternative. A better word is scenario.

Ss-cpa (talk|edits) said:

28 September 2010
I know we have hammered the principal residence exception pretty hard, but I'm not sure I understand this point. I think the principal residence exception is available in situations where Section 121 gain exclusion would apply if the house were sold for a gain. In Reg. Sec. 1.121-3(e)(2)(iii)(A), "Death" is specifically mentioned as a specific safe harbor. In the present case, death is the only reason why the condo was sold, even though it took so long to sell it. Can someone explain why this would not apply?

DaveFogel (talk|edits) said:

28 September 2010
Sec. 121 excludes GAIN from the sale or exchange of a principal residence, and there is no GAIN in this transaction. You cannot use Sec. 121 to exclude COD income, because Sec. 108 is the section to be used for that purpose.

If the debt is nonrecourse, then relief of the debt becomes the amount realized in the sale. $137,000 debt minus $152,000 basis equals a loss.

If the debt is recourse, then there is COD income equal to the amount of the debt ($137,000) minus the FMV of the property ($88,000), or $49,000. If the property is sold in a short sale, then the COD income is the amount of debt canceled by the lender, which you state will be approximately $55,000. I think that the consensus here is that the estate does not qualify for the principal residence exclusion of IRC §§108(a)(1)(E) and 108(h). Even if the estate could somehow qualify for this exclusion, in the case of a foreclosure or short sale, the basis of the property is not reduced by the exclusion because the estate does not own the property at the time that the debt is canceled. See Example 2 on page 15 of IRS Pub. 4681. As a result, there would be a loss equal to the FMV of the property ($88,000) minus its basis ($152,000), i.e., no gain.

Simply put, Sec. 121 doesn't apply here. Therefore, there is no need to consider the regulation you cited.

Dennis (talk|edits) said:

28 September 2010
The general insolvency rule is applied as at the time of debt cancellation. If what you are saying is the estate still had the money to pay the specific bequests you need to check with the attorney as to how Georgia law treats the obligation to have paid the specific bequests and whether that obligation is considered a liability.

Ss-cpa (talk|edits) said:

28 September 2010
Regarding point regarding death issues. Given the decline in the real estate market, there is probably a step-down in basis on the condo. I am in no way qualified to determine exactly what this should be, but I wouldn't want the IRS to say the value is the sales price at the date of death. http://mysite.verizon.net/vzeqrguz/housingbubble/ I went to this site to see how the prices went down over time. I took a factor of the changes in nominal prices and the condo purchase price to determine an approximate value of $132,000. With this value, there would be some gain. Although slow, I am finally in agreement with the fact that Sec. 121 does not apply. If this value is used, then a long-term capital gain (LTCG) if the mortgage is determined to be non-recourse and a dis-allowed long-term capital loss (LTCL) if the mortgage is determined to be recourse. Any LTCG would be swallowed up by the CLC.

Dennis, I will check with the attorney on this as soon as I organize some other thoughts. That would be great!

Ss-cpa (talk|edits) said:

28 September 2010
I also agree that the principal residence exception would not be allowed, so either non-recourse or insolvency.

To join in on this discussion, you must first log in.
Personal tools