Posts Tagged ‘1099-A’
The House, Senate and the President signed a law on April 14, 2011 that repeals the expanded “1099” reporting requirement for business and rental owners. The repealed law signed in under the Affordable Care Act removed the requirement for business and rental owners of rental properties to file 1099’s on payments of $600 or more for goods and services.
Fred Daus, CEO of Fredrick James Accounting, Tax and Consulting stated: “In essence, this law would have required that a business or landlord send a 1099 to Best Buy for the purchase of a $649 laptop used for their business”. “Imagine Best Buy’s response to a small business owners request for a W-9 so it can mail a 1099 to them for their purchases in 2011!”. “Most business’s, big and small, had no idea how to deal with the new 1099 filing requirements”. “This is a big win for all of the Small Business’s and Mom and Pop Landlord’s who would have had to pay the tremendous costs of preparing the 1099’s”. “We made our opinion heard, fought hard and our lawmakers listened to us!
Last week we talked about homeowner cancellation of debt tax issues. This week we’re going to talk about another tax consequence related specifically to home foreclosures. Did you know that the tax code treats losing a home to foreclosure as a sale and may result in a taxable gain or loss? (Yes, I am beginning to feel I should recant my statement from last week that Government isn’t entirely heartless.)
Let’s break it down and see how this plays out: A homeowner purchased a house back in 1999 for $100,000 ($10,000 down and a $90,000 mortgage). Over time, the price of the house increased substantially until, in 2005, the house was worth $250,000. That same year, the owner established a home equity line of credit and subsequently borrowed $50,000. The loan proceeds were used to pay off credit cards, medical bills, and a car loan.
Unfortunately, the homeowner was laid off in 2008 and could no longer make the mortgage and home equity payments. During the same time, the value of the house dropped to $120,000, yet the total balance of the mortgage and home equity loan was $135,000. This leaves the homeowner owing $15,000 in cash in order to sell the home. Since the homeowner was unemployed and had little to no savings, selling the house was not a feasible option.
After several months of missed loan payments, the bank foreclosed and took possession of the home. Shortly thereafter, the bank sold the house at auction for $120,000. Since the sale price for the house could not cover the total loan balance and the home owner was unemployed, the bank decided to cancel the remaining unpaid balance of $15,000.
Seems like “problem solved” for the homeowner, right? Not quite.
Using a worst-case scenario, the homeowner who is unemployed and lost their home to foreclosure would have to pay an additional $5,250 in income taxes.
In this situation, there are two separate tax calculations: cancellation of debt and abandonment of property due to foreclosure. To simplify matters we’ll only be looking at the abandonment of property in detail.
When a bank forecloses on the property the homeowner will receive a 1099-A (along with a 1099-C, if applicable). The 1009-A will show the outstanding loan balance and the home’s fair market value when foreclosure occurred. For tax purposes, the foreclosure is treated as sale with any gain or loss. In this example, the gain on abandonment is $20,000 ($120,000 fair market value less $100,000 basis). Assuming the homeowner meets primary home exclusion (discussed in my last blog), the gain would not be taxable. If the homeowner did not meet the exclusion, an ordinary gain of $20,000 would be included on homeowner’s tax return.
Again, let’s assume the homeowner is in the 15% tax bracket for this particular year and had to include the $20,000 as income. The foreclosure would cost the homeowner an additional $3,000 in taxes. Let’s not forget the potential for additional income tax due to cancellation of debt. Assuming the canceled debt of $15,000 could not be excluded from taxes, the taxable income would increase by that amount which would result in an additional $2,250 of income tax ($15,000 x 15% tax rate). Using a worst-case scenario, the homeowner who is unemployed and lost their home to foreclosure would have to pay an additional $5,250 in income taxes.
I should point out here that many foreclosed home owners will not fall under this worst-case scenario since tax laws have certain protections for primary residence homes. However, there are no protections in place for owners of foreclosed rental real estate properties.
If you find yourself one of the millions of Americans facing this kind of situation I would definitely recommend seeking the advice of a reputable Accountant. The tax laws related to foreclosed real estate property are very complicated and shouldn’t be taken lightly or ignored. The IRS doesn’t accept ignorance as an excuse and won’t be likely to offer any leniency in such cases so be proactive, get good advice and avoid taking your situation from bad to worse.
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Fred Daus is the Chief Executive Officer and founder of Fredrick James Accounting, Tax & Consulting. He is a member of National Society of Accountants and the National Society of Tax Professionals and has been helping clients save money since 2001. Fredrick James is an innovative, full service accounting firm in Clearwater, Florida with a focus on providing outstanding service, tax savings and financial growth to clients in the Tampa Bay area and Nationwide. Visit our website www.FredrickJames.com or call 727-230-0716 for more information.
U.S. Treasury Department Circular 230 Disclosure: In accordance with applicable professional regulations, please understand that, unless specifically stated otherwise, any written advice contained in, forwarded with, or attached to this communication is not a tax opinion and is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed under the Internal Revenue code. The information provided on this blog is not intended to provide or be a substitute for specific individualized accounting, tax, legal, business, or investment planning advice. Where specific advice is necessary or appropriate, Fredrick James, LLC recommends consultation with a qualified Accountant, Tax Advisor, Lawyer, Financial Planner or Investment Manager. The information provided herein is for general informational purposes only and should not be considered an individualized recommendation, personalized investment advice or an endorsement by Fredrick James, LLC. The information presented is prepared for a general overview of subject matter; however, its accuracy, completeness or reliability cannot be guaranteed and therefore should not be relied upon as such. Fredrick James, LLC accepts no liability for any direct or consequential loss arising from any use of this information.