[WSBARP] Short sale versus foreclosure tax issue
Randall Cornwall
rcornwall at hbslegal.com
Fri Apr 11 18:03:31 PDT 2014
Most conservative CPA's (and attorneys) will say that all the IRS cares
about is what was the nature of the debt at time the credit was extended
(recourse or non-recourse). I think when a mortgage is extended in
Washington it is recourse debt because the lender has an election of
remedies should the borrower default (judicial foreclosure, NJ
foreclosure, breach of contact etc.). The fact that the DOT statute
precludes a foreclosing lien holder from pursuing a borrower for a
deficiency post NJ foreclosure doesn't change the original nature of the
debt from recourse to non-recourse (in my opinion). People will disagree
with that sentiment - but there you go.
I believe both a NJ foreclosure and a short sale result in taxable debt
forgiveness (unless otherwise exempted), but there are plenty of good
faith arguments to rely on which say they don't for those taxpayers who
wish to play the audit lottery....
I basically tell borrowers the issue is unsettled, explain why, and then
let them work with their CPA to file their return.
Randall J. Cornwall
Harrison-Benis, LLP
2101 Fourth Avenue, Suite 1900, Seattle, WA 98121
P: 206.448.0402
F: 206.448.1843
www.harrison-benis.com
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From: wsbarp-owner at lists.wsbarppt.com [wsbarp-owner at lists.wsbarppt.com] on
behalf of Lynn Arends [lynn at lynnarends.com]
Sent: Friday, April 11, 2014 5:32 PM
To: <wsbarp at lists.wsbarppt.com>
Subject: Re: [WSBARP] Short sale versus foreclosure tax issue
According to the IRS, the whole issue regarding taxable consequences rests
with whether the debt is recourse or non-recourse. Forgiveness of a
non-recourse loan resulting from a foreclosure does not result in COD
income but forgiveness of debt from a recourse loan does. Thus, the
definition of what that debt is—non-recourse or recourse not
collectible—after the Trustee Sale is key. There is a difference of
opinions on this.
Lynn Arends
Attorney & Designated Broker
Lynn Arends Law Group & Lynn Arends Realty Group
www.lynnarends.com
Sent from my iPad
On Apr 11, 2014, at 5:20 PM, "Eric Nelsen" <Eric at sayrelawoffices.com>
wrote:
Sigh. It's late on Friday. Getting back to that second question-- So,
Lynn, does the bank issue a 1099-C for cancellation of debt, or does a
1099-S reporting sale of real estate get issued by somebody? Or both?
Sincerely,
Eric
Eric C. Nelsen
SAYRE LAW OFFICES, PLLC
1320 University St
Seattle WA 98101-2837
phone 206-625-0092
fax 206-625-9040
From: wsbarp-owner at lists.wsbarppt.com
[mailto:wsbarp-owner at lists.wsbarppt.com] On Behalf Of Eric Nelsen
Sent: Friday, April 11, 2014 5:14 PM
To: wsbarp at lists.wsbarppt.com
Subject: RE: [WSBARP] Short sale versus foreclosure tax issue
Scratch that second question--1099 reports total sale price, not
difference between value and debt. So the bank would just issue a 1099 for
the bid amount. It's up to the taxpayer, I guess, to assert a tax basis,
report the sale price, and deal with the difference.
Sincerely,
Eric
Eric C. Nelsen
SAYRE LAW OFFICES, PLLC
1320 University St
Seattle WA 98101-2837
phone 206-625-0092
fax 206-625-9040
From: wsbarp-owner at lists.wsbarppt.com
[mailto:wsbarp-owner at lists.wsbarppt.com] On Behalf Of Eric Nelsen
Sent: Friday, April 11, 2014 5:06 PM
To: wsbarp at lists.wsbarppt.com
Subject: RE: [WSBARP] Short sale versus foreclosure tax issue
Lynn--if the bank bids the amount owed, then there's no debt left, right?
How does non-recourse versus recourse even enter into it, when there's no
debt?
Or, are the banks ignoring their bid, and issuing 1099s based on their
estimate of the difference between market value of the property and the
amount of the debt?
Thanks for the referral--I may contact Ken.
Sincerely,
Eric
Eric C. Nelsen
SAYRE LAW OFFICES, PLLC
1320 University St
Seattle WA 98101-2837
phone 206-625-0092
fax 206-625-9040
From: wsbarp-owner at lists.wsbarppt.com
[mailto:wsbarp-owner at lists.wsbarppt.com] On Behalf Of Lynn Arends
Sent: Friday, April 11, 2014 4:58 PM
To: <wsbarp at lists.wsbarppt.com>
Subject: Re: [WSBARP] Short sale versus foreclosure tax issue
Even when the property reverts to the lender and the bank bids the amount
owed, that does not change the argument that Craig Blackmon referenced
earlier regarding whether this is now non-recourse debt or recourse debt
now uncollectible.
I counsel on both shorts sales and foreclosures and I can tell you that
some of my clients have received 1099s after a Trustee Sale.
I often refer my clients to Ken Weil in Seattle who is an excellent tax
and bankruptcy attorney, and well versed in this area.
Lynn Arends
Attorney & Designated Broker
Lynn Arends Realty & Lynn Arends Law Group
www.lynnarends.com
Sent from my iPad
On Apr 11, 2014, at 4:21 PM, "Eric Nelsen" <Eric at sayrelawoffices.com>
wrote:
Bryce--Interesting! So in your experience, with residential nonjudicials,
the banks usually don't fiddle around with bidding part of the debt?
And, for tax purposes, bidding the amount owed means that there's never
any debt forgiven, because the bank is effectively "willing" to buy the
property for the price of the full debt, regardless of the actual market
value. An interesting philosophical point on the definition of market
value.
I wonder what the IRS result would be if in a nonjudicial foreclosure, a
bank bid part of the debt, received the property, (of course) did not
receive a deficiency judgment because it's prohibited, but nevertheless
issued a 1099 for the difference between the bid and the total debt.
Sincerely,
Eric
Eric C. Nelsen
SAYRE LAW OFFICES, PLLC
1320 University St
Seattle WA 98101-2837
phone 206-625-0092
fax 206-625-9040
From: wsbarp-owner at lists.wsbarppt.com
[mailto:wsbarp-owner at lists.wsbarppt.com] On Behalf Of Bryce Dille
Sent: Friday, April 11, 2014 2:37 PM
To: wsbarp at lists.wsbarppt.com
Subject: Re: [WSBARP] Short sale versus foreclosure tax issue
In most cases in Residential setting bank bids the amount owed so it is a
non issue
Sent from my BlackBerry 10 smartphone on the Verizon Wireless 4G LTE
network.
From: Craig Blackmon
Sent: Friday, April 11, 2014 2:25 PM
To: wsbarp at lists.wsbarppt.com
Reply To: wsbarp at lists.wsbarppt.com
Subject: RE: [WSBARP] Short sale versus foreclosure tax issue
I believe so, but the fact of the matter is my counsel includes a very
large punt of all tax issues into the lap of a tax pro, so I’ve generally
faded from the picture by the time any 1099 arrives. I suspect others on
this list have a much better idea of the answer.
Craig
Craig Blackmon
Of Counsel Attorney at Law
<http://lawhg.net/> Holmquist & Gardiner, PLLC
1000 2nd Avenue, Suite 1770 Seattle, WA 98104
Main: (206) 438-9083 Direct: <tel:%28206%29%20694-4601> (206) 438-9295
Cell: (206) 369-5949 Fax: <tel:%28206%29%20694-4601> (206) 694-4601
Founder and Principal of <http://quillrealty.com/> Quill Realty
Smarter Service. Stronger Protection. More Savings.
<https://www.facebook.com/quillrealty> Facebook //
<https://twitter.com/QuillRealty> Twitter
This transmission is confidential and intended only for the recipient(s)
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to you in error, please delete it and notify the sender immediately.
From: <mailto:wsbarp-owner at lists.wsbarppt.com>
wsbarp-owner at lists.wsbarppt.com [mailto:wsbarp-owner at lists.wsbarppt.com]
On Behalf Of Eric Nelsen
Sent: Friday, April 11, 2014 2:20 PM
To: wsbarp at lists.wsbarppt.com
Subject: RE: [WSBARP] Short sale versus foreclosure tax issue
I should have known the simple question wasn't really simple. Thanks very
much, Craig.
In your experience, are banks issuing 1099s after nonjudicial foreclosures
(as opposed to after a short sale, which I believe they are doing
routinely)?
Sincerely,
Eric
Eric C. Nelsen
SAYRE LAW OFFICES, PLLC
1320 University St
Seattle WA 98101-2837
phone 206-625-0092
fax 206-625-9040
From: wsbarp-owner at lists.wsbarppt.com
[mailto:wsbarp-owner at lists.wsbarppt.com] On Behalf Of Craig Blackmon
Sent: Friday, April 11, 2014 2:14 PM
To: wsbarp at lists.wsbarppt.com
Subject: RE: [WSBARP] Short sale versus foreclosure tax issue
The answers are:
Yes, depending on whether the insolvency exemption applies (I believe the
principal residence exemption was not extended, but I could be wrong
there, and if I am wrong then that may apply as well); and yes
Depends on the tax professional with whom you are consulting. It is a
complicated issue. Some professionals (CPAs, tax attorneys) believe there
is no COD (cancellation of debt) income because a non-judicial foreclosure
results – essentially – in non-recourse debt (likely more of the former
and fewer of the latter hold this belief). Other professionals disagree
and believe in WA a non-judicial foreclosure still results in COD income,
again subject to those potential exemptions.
Craig
Craig Blackmon
Of Counsel Attorney at Law
<http://lawhg.net/> Holmquist & Gardiner, PLLC
1000 2nd Avenue, Suite 1770 Seattle, WA 98104
Main: (206) 438-9083 Direct: <tel:%28206%29%20694-4601> (206) 438-9295
Cell: (206) 369-5949 Fax: <tel:%28206%29%20694-4601> (206) 694-4601
Founder and Principal of <http://quillrealty.com/> Quill Realty
Smarter Service. Stronger Protection. More Savings.
<https://www.facebook.com/quillrealty> Facebook //
<https://twitter.com/QuillRealty> Twitter
This transmission is confidential and intended only for the recipient(s)
noted above. It also may contain materials protected by the
attorney-client privilege or work product doctrine. If it has been sent
to you in error, please delete it and notify the sender immediately.
From: <mailto:wsbarp-owner at lists.wsbarppt.com>
wsbarp-owner at lists.wsbarppt.com [mailto:wsbarp-owner at lists.wsbarppt.com]
On Behalf Of Eric Nelsen
Sent: Friday, April 11, 2014 2:03 PM
To: WSBA Real Property listserve (wsbarp at lists.wsbarppt.com)
Subject: [WSBARP] Short sale versus foreclosure tax issue
Basic questions--If client sells her residence at a short sale and the
bank takes, say, a $40,000 haircut, is that considered forgiveness-of-debt
income to the client that she has to pay taxes on? And does the bank issue
a 1099?
And, in comparison to an actual foreclosure--there's never a
forgiveness-of-debt-income issue on a residential nonjudicial foreclosure,
is there? Despite the lack of a deficiency judgment?
Sincerely,
Eric C. Nelsen
SAYRE LAW OFFICES, PLLC
1320 University St
Seattle WA 98101-2837
phone 206-625-0092
fax 206-625-9040
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