Discussion:Mortgage Interest for year of short sale

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Discussion Forum Index --> Advanced Tax Questions --> Mortgage Interest for year of short sale


Discussion Forum Index --> Tax Questions --> Mortgage Interest for year of short sale

GTSEA09 (talk|edits) said:

2 February 2010
I have a client who did a short sale that was completed in 2009. The canceled debt amount was approx 286,000 on form 1099-C. Box 3 of the 1099-C says Interest if included in box 2 is approx 15,000. My client received a form 1098 mortgage interest for 2009 for approx 40,000 for the same house. She only made one payment of about 2,500 in 2009. The form 1098 indicates this 40,000 has something to do with deferred interest. My question is can she write off the 40,000 since she did not pay it. It seems as if in the process of the short sale the interest got paid on the loan. That seems strange to me because if it is a short sale there are no funds to cover the interest. I am unsure as to whether she should deduct the interest on form 1098? And if yes does she subtract the 15,000 on form 1099-C? I could not find anything under the COD rules regarding mortgage interest in the year of a short sale.

Thanks!

GTS1101

DaveFogel (talk|edits) said:

2 February 2010
I guess the real question is how much of the interest was paid in the short sale and how much was forgiven, and it looks like you'll have to get more facts to determine this. Interest forgiven is not income to the extent that it results in a deduction. See Sec. 108(e)(2).
  • consolidating a discussion on same topic from same OP:

GTSEA09 (talk|edits) said:

8 March 2010

I have a client who did a short sale in 2009. It is a recourse loan. There is no gain as it was a huge loss. A 1099-C was issued and it shows in Box 3 Interest if included in box 2 40,716. Cancellation of debt in box 1 is 330,104. Then the bank issued a form 1098- mortgage interest statement showing 34,243.89 as mortgage interest paid in box 1. At the bottom of the 1098 it says payments applied to previously deferred interest. My client did not make any payments in 2009. I am assuming that some of the proceeds from the short sale went to pay the deferred interest. Two questions. Does my client get to write of the 34,244 interest paid on her behalf out of the short sale proceeds? And do I subtract the 40,716 from the 330,104 and use 289,388 as the cancelled debt amount because that 40,716 is interest that would have been deducted. Or if the client can deduct the 34,244 would I subtract out the difference between the 40,716 and the 34,244 which is 6,472 from the 330,104 as that is the amount that could be deducted if paid but wasn't. I haven't seen to many of the 1099-C's for mortgage loans with an amount in box 2.

Thanks! GTS1101

DaveFogel (talk|edits) said:

8 March 2010
Don't rely on the Form 1099-C without reviewing the closing statement for the short sale and asking your client a lot of questions. Find out the correct principal amount of the debt at the time of the short sale.

If the accrued interest was paid out of the proceeds of the short sale, then your client can deduct it. On the other hand, if the accrued interest was canceled, it does not result in either cancellation of debt income or a deduction. See IRC ยง108(e)(2).


Cotopop (talk|edits) said:

3 April 2011
For 2010 my client had cancelled debt of $228,000 resulting from a short sale of a rental. The rental was covered under Chapter 7 bankruptcy so there is no cancellation of debt income to be reported as well as no tax attribute . The same year he received a 1098 INT for $54,000 for mortgage interest paid through the short sale even though he made no mortgage payments at all for 16 months. My understanding is that he can deduct the $52,000 as mortgage interest on Schedule E. Doesn't seem right but that's what my research concludes.Any different opinions  ?

Makbo (talk|edits) said:

21 May 2011
Sec. 108(e)(2). does not distinguish between unpaid interest due to no longer making payments, vs. negative amortization that is part of the loan agreement (monthly payments do not need to cover monthly interest). So I assume both types of debt, if canceled, do not result in COD income.

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