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Forgiveness of Debt

bflbob

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Diane:

Hopefully you can give me some feedback on this...

I was discussing Short Sales with my attorney a ways back.
He indicated that the FOD might be offset by a capital loss.
I've stored this in the back of my head ever since.

Here's how I see it...mainly on commercial or investment property.

The seller bought the place a year ago at $200k and put $20k down.
Bank lent $180k on it, and is now preparing to foreclose for $184k including fees.
I make a Short Sale offer of $150k, which the seller and bank agree to.
The seller gets hit with a 1099 for FOD of $34k ($184 - $150k).
Wouldn't the seller also be able to claim a capital loss of $50k ($200-$150k) to offset the 1099?

I understand this wouldn't work for a residential seller, since there is no capital loss provision I'm aware of.

Thanks in advance for any light you might be able to shed on this.
 

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Diane Kennedy

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Aug 31, 2007
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Bob:

Great question that has a LONG answer. I'm back to back appts and getting ready for a trip to an orphanage to Juarez (leave at dark thirty tomorrow) and won't be back until Sun.

Anyway, give me a week and I'll come back to this.

I think it's a very timely question and there are some real tax implications here.

Diane
 

Diane Kennedy

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Aug 31, 2007
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Bump for Diane.
Thanks for the gentle reminder.

Let's start with a couple of basics on foreclosure. Foregiveness of debt (FOD) is generally taxable. It's considered ordinary income. NOTE: Don't always assume that a property that is foreclosed on or has a short sale on it will have FOD. In some states (AZ is one) the mortgage company can still come after the borrower for the difference. In other words, you have a property with a $200K note on it and it's subsequently foreclosed on or otherwise sold for $150K. You may or may not have FOD. The company might still come after you for the $50K still due.

Then, the next thing to consider is whether you're going to meet one of the two exemptions. (1) If you are insolvent, you will not have to pay tax. In other words, you can prove that your liabilities exceed your assets. Note that you do not have to file BK to get this exemption - just have to be able to prove that you're upside down. (2) If it's your primary residence, there is no FOD. That's part of a recent new tax law. (and the one that took a home loophole away in the progress)

Let's say that you can't meet any of the above exemptions and the company is definitely not going to pursue the extra debt. In fact, you've received a 1099C for the FOD.

In the same example, let's say that it's $200K, which is exactly the amount you paid (just to keep it simple). Your basis would normally be $150K (because you had FOD that reduced the amount due and the basis) but because you had to pay tax on the FOD, your basis is now $200K. Yet the selling price is $150K. that means you have a loss of $50K. Unfortunately, it's a capital loss and the amount of loss is limited to the amount of capital gains + $3,000.

So in that year, you'd have to pick up $50K of ordinary income and only get a loss of $3,000 on your tax return. Of course, you'll have a capital loss carryforward, but that sure doesn't help in the first year.
 

Diane Kennedy

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Aug 31, 2007
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Thanks Diane!

That really does help.

I am surprised to hear of the primary home exemption.
It will make a lot of Short Sale Investors happy.:thankyousign:
Now I get to do my rant about the primary home exemption...

They needed to find a way to pay for it, so they took away part of primary home gain exemption.

Through 12/31/07, here's how it works:

If you're married filing jointly and live in a home for 2 of the previous 5 years, then you can get a tax free capital gain exemption of $500,000. If you're single, it's $250,000.

After 1/1/08:

If you rent out your home (or have another principal residence) for any of the previous period, you only get a pro-rata portion of the gain excluded. Let's say that you normally would get a $500,000 tax free capital gain exclusion. But, only lived in your home for 2 of the previous 5 years. You sell the house and have $100,000 of gain. Old law: all would be excluded from tax. New law: You would pay tax on $60,000 of the gain. (2/5 or 40% is excluded)

So - makes the people who lost their houses happy...at the risk of extra tax for the people who were smart investors.

:smxE:
 

CarrieW

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Then, the next thing to consider is whether you're going to meet one of the two exemptions. (1) If you are insolvent, you will not have to pay tax. In other words, you can prove that your liabilities exceed your assets. Note that you do not have to file BK to get this exemption - just have to be able to prove that you're upside down. (2) If it's your primary residence, there is no FOD. That's part of a recent new tax law. (and the one that took a home loophole away in the progress)
What if it was a primary residence??? (we tried to sell it the bank wouldnt work a repayment/get back on track plan told us we didnt make enough money when we had just remortgaged not even 4 months prior to asking and nothing changed! they advised us to sell then declined every offer we submitted) house didnt sell and we moved to ga before the forclosure actually happened. We owned and used the house as a primary residence from 4/04-1/07

Im currently in a foreclosure. we had a mtg of 204k and now they are trying to get judgment against us for 241k... they may already have it. im not sure about the papers i got...

we are def insolvent. cant get an answer from anywhere how to make the irs think so lol, no forms, cant get anyone at the irs to answer me they say they arent allowed or theres a special dept then transfer me for ever till i get disconnected, I havent gotten any info on it from accountants ive spoken with.

I am hoping once the sheriff sale happens whatever they get for the house comes off the 241k. Im still confused how it got to 241k i thought you could only be sued for the actual mtg amount ad not the penaties... but alas I have no clue. I have left about a dozen messages for the banks attorneys and they WILL NOT RETURN MY CALLS!

at this point we dont have the money for a lawyer the house is in pa we are in ga. I have no clue whats going on and despite my best efforts I cant find one useful piece of info untill today!

I hope there will be no fod due to the fact it was a primary residence!

any info anyone can share would be awesome!
 

randallg99

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Aug 9, 2007
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>>>I have left about a dozen messages for the banks attorneys and they WILL NOT RETURN MY CALLS!<<<

Relying on a message forum is a good place to get started, but you really need to get some solid info and protect any of your other assets.

Stop calling the bank's attorney since they are not obligated to call you and quite frankly, you should really spend energy to find and consult your own lawyer to represent you...You do have rights, but they can't be excercised if the property is already foreclosed.... Letters via fax instead of phone calls are much better correspondence. Attorneys just about always respond to letters that have dates and expectations.

but the mere fact that you are not even sure if the property has been foreclosed is mind boggling...
 

CarrieW

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the reasons I dont know are many LOL>

I got a letter after the hearing saying they were issued a summary judgment. I assume this was the forclosure. nothing ive gotten so far says forclosure on it...

about 2 wks after i got the summary judgment i got the paperwork with the amount of 241k on it.

Ive offered on several occosions prior to this to just sign the house over and they wont take it.

I havent gotten anything saying ive been removed from the deed yet.

its not listed for sheriff sale yet.


as soon as whatever those papers were hit the county records we started getting snail mail for pa bankrupcy attorneys.(sayin we can help you save your house!)

we cant and dont want to try to keep the house.

I dont have the money to talk to an attorney for the bankrupcy forclosure or otherwise.

I bought the house. then couldnt pay for it.there taking it back and i have to deal with the aftermath is basically how i see it. if we have to file insolvency or bankrupcy when its done then we will...

I really have no clue what to do! I tried finding solutions to this from about 12 months before we were in danger of losing the property. we moved out just about 12 months ago. Im so beyond burnt out on house buisness its real easy not to pay attention to it!
 

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CarrieW

Gold Contributor
Read Millionaire Fastlane
Speedway Pass
Nov 12, 2007
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suburbs of savannah in Ga
we have no other assets.

I did alot of research and tried to put an addendum into our sales agreements that the bank had to sign off on in order to sell the property. I can pull out the addendum if you like.

It was in reguards to fod and thier recourse on the loan. thats why the sales agreements were declined.

So as we could come to no conclusion (after about 4 agreements of sale with different investors) and we moved 13 hrs out of state we are now just waiting untill its over. Theres not a whole lot more we can do at this point other then to come up with an @$$ load of money to pay off the back debt ad reinstate the loan.

If we dont sign off on the deed with the house being in pa they (or any investor willing to purchase)cant do anything with the house untill the 1 yr runs out after foreclosure in case i excerise my final rights and reinstate the loan. or apparently if I had the money to file for bankrupcy and pay it out in which case the house is mine again.

If we stayed in pa I would probably still be living in the house. we just wanted to pay our bills...they said we didnt qualify for any help they offered or a back on track plan and advised us to sell. so we tried and then moved (still tried to sell)and have been renting since.
 

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