Question

Sadly, Mr. & Mrs. Client have just lost their home to foreclosure. The Form 1099-C they (already) received from their bank correctly reports $400,000 in Box 2 as the outstanding principal of their mortgage debt as of the foreclosure date. Box 4 contains the word “mortgage”. The only other numbered boxes with any entry are Box 1 (the date) and Box 5, which is checked. Box 7 is blank. Mr. & Mrs. Client (i) are NOT insolvent and (ii) will not file for bankruptcy protection. Discuss how you can help Mr. & Mrs. Client in terms of their federal income tax liability on these facts.

Answer 1

Mr. & Mrs. Client have already received 1099-C towards foreclosure of their debt and the cancellation of their mortgage.

This, however, doesn't mean that you're INSOLVENT and any forgiven debt is reported as taxable income.

The IRS takes the position that the money was received from the foreclosure since the lender paid money towards buying the home and that was not returned back. Hence, forgiven debt reported becomes taxable income.

Section 121 allows exclusion of 250,000 $, if filed individually, and 500,000 $ if filed jointly towards capital gains from the sale of house property. For the same, the tax payer must have resided in the property for more than 2 years.

Me. & Mrs. Client can file their annual return income in 1099-A declaring their income and any tax payable thereon.