Law Offices of Hilton Wiener Issues Tax Opinion to Real Estate Investor Stating That a 1099-C Following the Settlement of a Foreclosure is Not Taxable Income
New York, NY, February 06, 2013 --(PR.com
)-- There is considerable confusion among homeowners, investors and even accounting professionals concerning the proper tax treatment of cancellation of debt income. The tax consequences for short sale or foreclosure of a primary residence are clear, but the investor or second home owner has greater problems. Compounding the confusion is that some taxpayers have received a form 1099-C, others a form 1099-A, while others have received notices from the IRS concerning the failure to include cancellation of debt income in a prior year’s tax return.
It is not unusual for debts which are in default to be settled for less than the amount due, by payment of a lump sum. Creditors often do this when they believe that they will have difficulty collecting the full amount. Debtors, particularly those who are not filing bankruptcy, may find this preferable to attempting to catch up by making payments.
The IRS considers the difference between what was owed, and what was paid to be income to the debtor, and requires creditors to report this whenever the amount exceeds $600.00. The debt must be reported as ordinary income on form 1040.
There are a number of situations in which the “income” is not taxed, the most significant being:
● Debts discharged in Bankruptcy
● Debts resulting from the foreclosure of a principal residence, or under the Homeowners Affordable Modification Program. Note that this often discussed exception is not applicable to second homes and investment property.
● Debts forgiven when the taxpayer was insolvent (debts exceed assets)
More information about this is available from IRS Publication 4681.
If an exception applies, it can be claimed on Form 982, available at http://www.irs.gov/pub/irs-pdf/f982.pdf , which should be filed with the tax return.
One question which the IRS does not discuss is the difference between debts that are cancelled and debt which was the subject of a genuine dispute. Simply put, the settlement of a bona fide dispute for less than face amount is not cancellation of indebtedness.
So what is a bona fide dispute? A taxpayer can be sure that raising the typical foreclosure defenses, used primarily for the purpose of delay, will not qualify and will only result in a rather strong rebuke (and penalty) from the IRS. On the other hand, the Law Office of Hilton Wiener has successfully issued tax opinion letters where the particular facts of the case support it. Each case is different and the facts must be thoroughly analyzed and well documented.
As with most areas involving tax planning, it behooves a client to get an attorney involved prior to settlement of the lawsuit so that it can be structured properly in advance to enable the client to obtain the desired tax position. 1099′s are being issued right now.
A real estate investor (especially one owning properties that are underwater), has much different concerns than a taxpayer dealing with his or her primary residence.
Law Office of Hilton M. Wiener
100 Park Avenue
New York, New York 10017-5516
Web site: www.ReturnTheDeed.com
Linked in: www.linkedin.com/in/hiltonwiener