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Rental Short Sale and Assumed Loan-Seller Got 1099-C

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Old 02-07-2014, 01:24 AM
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Location: Elk Grove, CA
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Rental Short Sale on an Assumed Loan-Seller Got 1099-C

Hello,
I purchased a Las Vegas rental home in 2007 for $500,000 in a private sale. I 'informally' assumed the existing $450,000 loan from the seller. The loan I assumed was the original purchase loan. This not structured as an installment sale.
In 2012, my tenant moved out and I deeded the house back to the Seller (right before his Short Sale). The house sold for $180,000 to an unknown third party.
The Seller received a 1099-C for roughly $278,000 and he's naturally very upset. The Seller originally purchased the property for $575,000 and I understand that he wrote off the original loss of $50K ($575K-$550K) in 2007.
Over the years, I've been paying for the mortgage, taxes, etc. and reported it all on my Sch E with a note that the loan was still under the seller's name.
Can he amend his 2007 tax return? If he purchased it for $575K and sold short for $180K in 2013, wouldn't that mean a $395K loss to him? Which year would he report the additional loss? How can he offset or report the 1099-C for $278K issued in 2013? Thanks for your help on this. I don't him any more upset than he is, and I believe he is being given misinformation.


Last edited by tanicete : 02-07-2014 at 01:34 AM. Reason: Added more info.


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Old 02-07-2014, 11:58 PM
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Quote:
Originally Posted by tanicete View Post


#1;I purchased a Las Vegas rental home in 2007 for $500,000 in a private sale. I 'informally' assumed the existing $450,000 loan from the seller. The loan I assumed was the original purchase loan. This not structured as an installment sale.
In 2012, my tenant moved out and I deeded the house back to the Seller (right before his Short Sale). The house sold for $180,000 to an unknown third party.
The Seller received a 1099-C for roughly $278,000 and he's naturally very upset. The Seller originally purchased the property for $575,000 and I understand that he wrote off the original loss of $50K ($575K-$550K) in 2007.
Over the years, I've been paying for the mortgage, taxes, etc. and reported it all on my Sch E with a note that the loan was still under the seller's name.
Can he amend his 2007 tax return?



#2;If he purchased it for $575K and sold short for $180K in 2013, wouldn't that mean a $395K loss to him?


#3;Which year would he report the additional loss?


#4;How can he offset or report the 1099-C for $278K issued in 2013? Thanks for your help on this. I don't him any more upset than he is, and I believe he is being given misinformation.
#1; in general, some debts that are canceled are taxable income. Individuals who default on a debt are issued a Form 1099-C. Individuals receiving a 1099-C after they have already filed their taxes need to file an amended return of1040X to amend their return to report this income on1040 line 21. It is important to report Form 1099-C debt cancellation because the IRS also receives a copy of the same form from the lender.


#2; Short sale is a term to describe the act of selling your property below its original purchase price The Mortgage Debt Forgiveness Relief Act does not apply to rental properties - it's specifically for those who have had loan mods, short sales or foreclosures on their principal residences.basically, The tax liability on short sale starts ;what was your gain / loss on the short sale itself. This question has nothing to do with $395k shortage. It has to do with whathe paid for the property originally, including original loan (basis of the property), depreciation of the rental property if he took any, closing costs, and the selling price negotiated at the short sale reported on form 1099-S.for example: loan debt $400k,sale price $300k minus $70k closing costs minus initial purchase price $480k plus depreciation $60k = $190k loss.What was owed on the property does not matter. What the property was worth on the open market does not matter. On the contrary,short sale used to be that a seller had to pay income tax on the amount the payment was short. So, if you owed the bank $400k and you paid back only $230k when the sale closed, the $170k that you are short is taxed as ordinary income. You will get 1099 from your bank for $170K. the loss of $190k doesnt count here. Whatever income you had from 1099, you need to pay tax on it.

#3;Addtl loss?? I guess you mean the loss of $395K.As mentioned above in the example above, in 2013, $170K on 1099 needs to be reported on the 2013 return.

#4;when you receive a 1099C, you need to report it on your Form 1040 when you file your taxes; you must report amounts on the form as "other income" on line 21 of Form 1040. You must also list the type and amount of income on this line.



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