Dennis Norman
Over the past few days I have heard stories of people that have lost their homes through foreclosure and then, as if that was not enough, were told by their tax preparer that they owed thousands of dollars in taxes for “forgiven debt”.
As bad as this sounds it is reality…or at least was reality. Let me give a quick example….You bought a home for $150,000 back in 2000….during the boom it’s value shot up to $300,000…..you need money for the kids college so you refinanced and borrowed $240,000 on your home, or $90,000 more than you actually had “in” it. Unforutnately a few months later you lose your job, can’t make the payments and the lender forecloses on your house. At this time you would normally be olbigated to pay income tax on the $90,000 you borrowed in excess of your cost.
Talk about a double whammy….first you lose your house, then you get a huge tax bill from the IRS….ugh..
Fortunately this is not the case today. Thanks to the Mortgage Forgiveness Debt Relief Act of 2007, assuming you meet the qualifications, if you lose your home to foreclosure you won’t be facing the big tax bill from Uncle Sam.
In the stories I heard the persons tax preparer was not aware of this and therefore included the income reported on the 1099 from the lender for forgiven debt as income. Fortunately all that is necessary to receive relief from this act is to file an IRS form 982
If you lost a home to foreclosure in the past two years I would suggest you ask your tax preparer about the Mortgage Forgiveness Debt Relief Act of 2007 and make sure you ahve not paid taxes on debt forgiveness that you should not have.
The IRS has a publication that explains this in great detail if you would like to learn more click here.
Related posts:
- the Mortgage Forgiveness Debt Relief Act of 2007 – Update
- Will you owe taxes on a short-sale or foreclosure?
- FTC Issues Final Rule Banning Upfront Fees From Mortgage Relief Companies
- California REALTORS Push Legislation To Extend Anti-Deficiency Protection for Homeowners
- What to do when you owe more than your home is worth
Nerses,
You have a point. I have less sympathy for those who walked away from homes but had enough assets to cover their upside-down positions. I definitely don’t have sympathy for speculators who walked away from investment homes, although they can’t use IRS form 982 because it applies to qualified primary residences.
I will look at the Pub 4681 worksheet. If you can claim the fair market value of your house as an asset, and the outstanding mortgage a liability, then I was certainly “insolvent”, i.e. liabilities exceeded assets. However, I’d rather use 982 for my federal taxes. May be hard to prove my insolvent position at time of short-sale. Also, if you do use 982, is it an “admission” that you were not insolvent? Will it prevent you from using insolvency for CA taxes?
Hi Guys,
This is how California sees it, and I mostly agree with the state:
If you truly gave everything but at the end lost your home, then most likely you were insolvent at that time and (by use of the Insolvency Worksheet in IRS Pub 4681) you should not pay state or federal taxes, even if your “forgiven” mortgage was recourse loan. But if you simply walked away from your home and you were not insolvent (or walked away from your investment home) then it was simply a business decision and California does not see why you should avoid paying taxes. I assume most of us should qualify for insolvency.
Insolvency might be a touchy subject, since it includes interest of retirement accounts and value of pension plans, according to IRS Pub 4681.
hey deb
u have until 4-15-2010….i am holding off until the last minute..you can file your fed now and your state later
SBx8_32 has been passed by the senate and is now in the assembly.
SBx8_25 has not been to the senate floor yet so is much further behind
Are there any other bills? We just need one to go through but I am not sure how much longer I can delay paying my taxes!
there are so many versions now that i don’t even know which one is the right one!
What are SBX8 32? I thought this was further ahead of SB 25
email addresses for the two senators who introduced SB 25 on 02-04-2010. SB 25 seems to be the replacement for SB 97.
Senator.Calderon@senate.ca.gov
Senator.Correa@senate.ca.gov
email them and ask for an update on this bill. they need to know that WE WANT THIS TO PASS!
If you get the chance to read the suicide note of Joe Stack, the man who flew his plane into the IRS building in Austin, read it. The man had finally had enough. I think we can all feel his anger and frustration. His way of dealing with it was out of control…but it is my hope that something good will come out of it.
soome people have just had enough….if they are already unstable…something put him over the edge!
This is bad….
http://news.yahoo.com/s/ap/20100218/ap_on_re_us/us_plane_crash_texas
On non-recourse loans, box 5 of the 1099-C should be checked NO! This one simple thing is what will cause us to show as owing taxes. The IRS has a form that “wipes out” the 1099-C, regardless of whether the box is checked yes or no. BUT the state does not have this…as we all know.
If your bank is refusing to correct the form, as mine and others are doing, you need to send a letter to the banks tax dept, as well as the higher ups in the bank. You also need to send a complaint to the State Attorney General, the Dept. of Corporations Consumer Affairs, and the Federal Reserve Consumer Complaint Dept.
Banks SHOULD NOT be allowed to send out false tax forms!
I am at my wits end. My health is suffering because of all of this stress. I am lucky to sleep at night.
What really ticked me off today when I was talking to the bank and that they just repeat themselves over and over saying that they sent a correct 1099-C. It was a loss to them. They will not change the 1099-C. For me to consult my tax preparer if I dispute the form.
HOW can my tax guy file ACCURATE taxes if I have INACCURATE forms?
Seems like the lenders all act differently. My 1st mortgage lender sent a 1099-C with box 5 checked “yes” while the purchase money HELOC lender sent one with “no”. Thought it would be other way around because 1st purchase money mortgages are definitely non-recourse while HELOCs are more questionable. The 1st was originally Wells-Fargo but they sold the loan to some outfit in Virginia, and people I spoke with were cluless about definition of recourse vs non-recourse. Will keep trying them.
WELL…if only if it we as easy as I had hoped…..
the bank REFUSES to change the 1099-C. I spoke to three different people.
So now I have to still file taxes with the WRONG form, which results in me owing taxes. So now I am back to square one where we have to wait to see if the California will pass the bill to conform with the federal rule on short-sales.
I just spoke to the IRS. If you received a 1099-C and your loan was a non-recourse loan (sole purchase money)then box 5 needs to be checked NO!
MINE was checked YES and that is where the error is…at least in my case.
I then called my lender and requested a corrected 1099-C to be sent to me.
Now I just have to wait.
I had the darndest time getting any lawyers to go on record about this recourse question, so I went ahead and published my research anyway. The National Association of Realtors provides a memo about this to their paid members only – hopefully they will go on record at some point as well. I published my findings at examiner.com on October 5th, 2009:
Even seasoned real estate practitioners are under the impression that mortgages on primary residences are all non-recourse – in other words, if selling the house doesn’t raise enough money to pay off all the mortgages, the lender has no recourse to any other recovery method. This is NOT true. California law offers some protection here, but according to the Code (Cal. Code Civ. Proc. Section 580b) it is limited to primary residence purchase money. After reading the entire Deeds of Trust, for the “purchase money” loan (mortgages taken out at the time of purchase, not afterwards) and my most current loan, I could find nothing in the deeds barring recourse to the borrower. The protection is not in the lending documents, it is in the State Law Codes. Equity Lines and Second Trust Deeds are not mentioned in the California code. If the lender decides to pursue a “deficiency judgment” for the difference between what was borrowed and what was collected, only the mortgages used to initially buy the owner’s primary residence are considered non-recourse debt. That means the lender has recourse, meaning “permission to pursue” the borrower for the shortfall. Right now, it appears that lenders are not engaging in this public relations nightmare, but the big black granite sculpture in the plaza of the former Bank of America building wasn’t dubbed The Banker’s Heart for nothing.
http://www.examiner.com/x-16414-SF-Personal-Banking-Examiner~y2009m10d5-Homeowners-underwater-on-debt-tossed-anchors
Nerses
I believe that you are correct. From the two pages that I found today…non-recourse equals NO “phantom” income which means no taxes due. Federal or State.
The problem is that the lenders are sending out 1099-C forms when they should not be. So now we have to contact the lenders to get that straightened out.
i am not even looking forward to dealing with lender. I can just imagine the hell that is going to be. You know they are going to think that they are right in sending it out!
I looked all over the IRS page to see if there is some form that would be filed to show that the loans were non-recourse, but I can’t find one. The lender needs to remove the 1099-C or something to that effect because one was also sent to the IRS.
Like I said, I will simply file my taxes and not include the 1099-C if the lender doesn’t reverse, remove, repeal
(whatever it is called) it from my record.
Guys, looks like you are starting to concur with my statement/question from Yesterday: “Am I right in my research that forgiven purchase money or nonrecourse loan (even when it’s a HELOC) is not California State taxable.”
Jason
I am so glad that we have the internet. i am finding out so much information.
The IRS link was great to find.
I had a 1st and 2nd on my conod…but both were pure purchase money. Both non-recourse. Both of mine are checked yes on box 5. what got me was that they have ZERO in box 7, fair Market value.
I truely think they don’t know what is going on. I already left a voicemail with my lender and will follow up with them if I have not heard from them by Wednesday.
If they refuse to reverse, remove, whatever, the 1099-C then I will file my taxes WITHOUT out it and include a note explaining as to why. Then the IRS can contact me if they need to.
I am sick of all of this!
Coletta,
I just looked at the FTB link and to me it looks like forgiven non-recourse debt is not taxable. They also state that purchase money loans are generally non-recourse in CA. My interpretation is that we’re in the clear.
In my case, I financed with a 1st mortgage and a purchase money HELOC. The 1st mortgage lender sent me a 1099-C with box 5 checked “yes” (i.e. I was personally liable for debt), while the HELOC lender sent a 1099-C with box 5 checked “no”. Seems like the lenders are confused about what to send. I called my 1st lender but they were clueless. Look forward to hearing what your lender says.
Looks like I will be contacting my lender next week. By reading the info in the above link for the IRS, I discovered that since my loan was a non-recourse loan…that is NOT considered INCOME FROM A CANCELATION OF DEBT. So the lender should not have even sent me a 1099-C.
Here is the wording from the link: Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.
Here is another one:
Step 1 – Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section. You have no income from cancellation of debt.)
I suggest you all call your lenders as well and have the link above available. If it was a non-recourse loan….NO 1099-C should have been sent out in the first place!
here is the IRS link that the state board references:
http://www.irs.gov/newsroom/article/0,,id=174034,00.html
found this info on the ca state tax board site in regards to non-recouse loans. Looks like they “fixed” it so that in 2009 non-recourse doesn’t matter…you will still owe taxes:
If the loan is a recourse loan, then depending on the facts, you may have COD income, and potentially a reportable gain, in which case you would want to determine if one of the provisions in IRC section 108 would apply, allowing the COD income from the discharge of indebtedness to be excluded.
For 2007 and 2008, California conformed, with modifications to IRC section 108 (a)(1) (E) that allows a limited amount of COD income resulting from the foreclosure or short sale of a qualified principal residence to be excluded. However, this exclusion is currently not allowable for any foreclosure or short sale that occurs on or after January 1, 2009. (Note: There is pending legislation that would extend the California exclusion, SB 97 and AB 111.) One of the provisions available in IRC section 108 that might apply is the insolvency rule, which would apply if a taxpayer has COD income and is insolvent (total liabilities exceed total assets); in that case, the exclusion only applies up to the amount of insolvency, (to the extent, liabilities exceed assets).
not sure what the rules are on insolvency. the bank fought with us before allowing us to do a short sale because THEY thought that had enough money to keep the condo. (guess they don’t care if you would like to be able to buy food or not) So, I am sure it is a battle with the state too.
Worth giving it a shot though.
Guys, again what if we file as insolvent? No need to pay tax when a person was insolvent before the cancellation of the debt.
Nerses…turbo tax worked great for federal. not state. i am checking with a CPA when I finally file my taxes…which won’t be until the last minute now. Others are filing usiing CPA and the like and they are also being told they owe money. It is like th non-recourse is not counting. I don’t understand it!.
Jason…THAT is my exact question too. I don’t have the money. I am on unemployment. If they were to garnish ANY money we would not be able to pay our current bills. SAD…but my CPA friend ‘suggested” that if the bills don’t pass….to not file my state taxes at all.
I just wonder what the state will do if the bills are not passed and we do have to pay tax on this phantom income. Tens of thousands will probably be affected. How will they collect from thousands of people who don’t have cash to pay their tax bills?
Thank you Jason and Coletta for all you valuable information. This page is very helpful!!
Jason, I posted the same question to FTB last week and no reply also.
Coletta, so what you are saying is that your “forgiven” debt was purchase money and you have to pay state tax on that? Who told you that you owe it? I know for sure that TurboTax is not reliable at all. It was not ever able to correctly generate my federal 982 form.
Hey guys, another option is to file insolvency to avoid paying state tax. Am I right? (Assuming assets were less than the debt.)
Nerses
THIS is where there is a lot of confusion. My realtor assumed we would not owe taxes to CA because our loan was a non-recourse loan as well…but….we do in fact OWE taxes on the “phantom” income. This is what is happening over and over again as people start to file taxes. There must be some “rule” that is being ignored or they have some lopphole in that rule does not apply to short-sales. i don’t understand it either but even the CPA’s are saying that people are owing taxes….so it is a mess.
Nerses,
The IRS website states that forgiven non-recourse debt is not taxable. All CA purchase money loans are considered non-recourse accordingly to CA civil code 580b (however I won’t pretend to understand the legalese in that code). Based on this, I believe purchase money loans are also not CA taxable. I’ve posed this question to the FTB but no one will give me a straight answer.
Am I right in my research that forgiven purchase money or nonrecourse loan (even when it’s a HELOC) is not California State taxable.
here is the link…it was too short…http://www.cbs2.com/video/?id=127464@kcbs.dayport.com
HORRIBLE segment on KCAL 9 last night. It was barely 5 minutes long. The guy they chose to “show” was hard to understand because of his broken English, so that is not going to get any sympathy for our cause. The CPA they spoke to was negative about whole situation and had an “oh well” attitude about it. They did not speak to anyone in Sacramento. They did not speak to anyone at the Tax Board. They didn’t bother to ask anyone in Sacramento or at the Tax Board HOW they expect to collect this money that they claim we owe!!!!
I wanted them to do a STORY on it. Not a 5 minute blurb that was done so poorly that no one is going to even care!
hammerfest
i say don’t file. how are they gonna find you? just think how many others have left the state. i would if i could.
I left California in 2008 but did a short-sale on my home there in 2009. Because I was a non-resident in 2009, I’m thinking about not even filing a CA extension because I won’t have any CA income to report if the bill passes. Anyone else in my boat?
I found info today showing motgage relief act is part of another bill currently active. SBX8 32 is the bill number and show activity this week.
http://www.aroundthecapitol.com/Bills/SBX8_32
The bill text is here and its a big bill, you will need to search “mortgage” within the doc to find it.
http://www.aroundthecapitol.com/billtrack/text.html?bvid=20098SB3299INT
I found it interesting that both SB 97 and this bill state.
the last couple of sentences caught my attention and i saw this in both bills.
c) This section shall apply to discharges of
indebtedness occurring on or after January 1, 2007, and,
notwithstanding any other law to the contrary, no penalties or
interest shall be due with respect to the discharge of qualified
principal residence indebtedness during the 2007 or 2009
taxable year regardless of whether or not the taxpayer reports the
discharge on his or her return for the 2007 or 2009
taxable year.
I emailed Scott McFarlane and received this back: If you look at the bottom he says another bill was introduced on 2/5/10. After searching this bill I found this which shows everything on the bill: http://dist06.casen.govoffice.com/index.asp?Type=B_PR&SEC=%7BF6FF3E1C-F0CF-4B93-91F3-DA32A1D3E8F8%7D&DE=%7BBF632762-1C90-43C3-81D0-471483F925B3%7D
The Franchise Tax Board staff analyzes bills for the benefit of the Legislature and the public. We do not take positions on bills. As you know, only members of the Legislature can vote for bills and change the law.
We encourage you to contact the state Assembly Member and Senator for your district, and the Governor’s office to express your concerns over this issue. Your state Assembly Member and Senator can be found by entering your zip code at this website: http://www.leginfo.ca.gov/yourleg.html. The Governor’s office number is (916) 445-4341.
The current status of California mortgage debt forgiveness is as follows:
Summary
Federal mortgage debt forgiveness applies to discharges occurring in 2007 – 2012. California conforms, with modifications, to federal mortgage debt forgiveness, but only for discharges that occurred in 2007 and 2008 (R&TC section 17144.5, as added by SB 1055). There is currently no California exclusion (for mortgage debt forgiveness) for discharges occurring in 2009 or later.
In 2009
Three bills introduced in 2009 would have extended California’s modified conformity to mortgage debt forgiveness: AB 111, SB 97 , and AB 1580. Both AB 111 and SB 97 were held in committee. AB 1580 was passed by the legislature on September 10, 2009, but then vetoed by the Governor on October 11, 2009.
In 2010
SB 97 (Calderon and Correa) was amended on January 11, 2010; that bill, if enacted in its current version, would retroactively apply (i.e. CA’s modified conformity) to discharges that occurred in 2009, and would allow up to $500,000 of mortgage debt forgiveness to be excluded from income.
SBX8 32 was (Wolk and Leno) was introduced on February 5, 2007. That bill, if enacted in its current version, would provide the same mortgage debt forgiveness as SB 97 (Calderon and Correa). We expect that the Legislature may act quickly to send this bill to the Governor early in the session as it is a “special session” bill.
Scott McFarlane
(916) 845-6075
let us know how that goes. i emailed kcal 9 and channel 5 weeks ago and have never heard back.
I just emailed CBS, ABC, NBC and FOX here in Los Angeles to run stories to make more California taxpayers aware.
The interview went great. I was so pumped up that I could have talked for hours. Short segment, only about 15 minutes…but it still felt great to help to get the word out on this topic.
PLEASE call your local news radio stations. That is the best way to get this story out there. If enough small stations become involved then it will eventually get to a larger news audience!
Good luck Coletta! You’ll do fine on the show. Thanks for speaking up for all of us.
Here is another facebook page related to all this:
http://www.facebook.com/pages/The-Peoples-Page-1099-C/451897945530?ref=mf
FYI:
Today between 3 & 4 on AM1490 out of Santa Barbara, The Nick & Paul show will be discussing this issue. I have been invited to call in. I hope that this will get the word out to more people. I will try my best to not sound like an idiot or freeze up!
Good Luck today Coletta! I am in San Diego and will not hear the broacast but will be cheering you on from So. Cal. This is SO IMPORTANT and I am very excited to see the word get out there. I cannot believe how CA, being the third most foreclosures in the country, does NOT recognize a Federal Act created for that very reason. Especially when the reason for most of these defaults in the first place is that bailed out banks would not negotiate loan mods even when mandated by congress. This created a large part of this situation and now the people (whose tax dollars bailed out those institutions who supposedly had a “loss” on the foreclosed properties) have to pay taxes on the unfounded “loss”. The only losers are the borrowers that fell victim to this. It is completely unjust and I think criminal morally.
GOOD LUCK TODAY!
Becky
Thanks for that article. I have attached it to the FB page as well as shared it with some people I know.
Coletta
I came across this relevant and on-topic article from the examiner.com. It is dated 12/29/09. It has only a single comment in its comment section.
http://www.examiner.com/x-16414-SF-Personal-Banking-Examiner~y2009m12d29-The-Grinch-that-stole-the-money-that-isnt-there
On the above example, the $90,000 would be taxable under the tax relief act 2007 because the fund were not used for the rebuilding of the house, right? You said it would be forgiven. Am I missing something?
I was just invited to call in to the Nick & Paul show, out of Santa Barbara, next week to discuss (sb 97). If you get AM1490, this could be our chance to get the word out to more people. Not sure which day it will be yet. I will keep you all informed.
Thanks for the kind works, Dennis.
Hats off to Coletta, Laura and others for all the time they’ve put into this. I grew very concerned when I discovered the CA tax problem for myself several weeks ago, and wondered why people weren’t up in arms about it. Now it looks things are gaining momentum.
I have to say I am impressed by the way everyone has been communicating, sharing information and going to work to organize yourselves to address this issue! I have been watching the comments and the actions eveyrone has been taking from contacting politicians, setting up the facebook page, etc…..MY hat’s off to you guys, great work!
I hope that you will continue to post updates to this blog and continue to communicate through it so I can follow…I’m planning to do a new article specifically on the problem in California with this and may contact some of you to see if you would like to share your story in the article…
Best of luck to you and God Bless…
Dennis
For sure Dennis and likewise, please come join our Facebook Group, we can even set up a Forum for people to submit their stories for your article…
Hello-
I found this online forum last week after a short session on Turbotax informed me that I will owe about $20,000 on the short sale of my home. I am livid that this state allowed debt forgiveness for those who lost their homes in 2007 and 2008, but now for 2009, a record year for foreclosures and short sales, the state wants to collect on cancelled debt. For many on the edge of the economic precipice, this tax will throw them over. I can see why so many people leave this state.
Thanks for sharing all the information about the happenings at the state capitol. I just finised a letter to the editor of the local paper. I hope there will be some common sense resolutions for us all from this state and the FTB.