Des Plaines, IL · Member since 2011 · 6 posts · 1 vote
Hello. I had a house in the suburban Chicago area for 5 years. The first 3 years it was a primary residence. Then once we decided to increase our family we bought a new house and converted the first house to a rental in 2010. The market was horrendous then so there was no way we could sell. After 2 years of renting we could no longer carry the house and losses mounted. So we short sold the house (as a rental) in 2012. We received a 1099-C in year 2015 and now have to put it on our taxes. It's for 125k. Do we have to pay taxes on this amount forgiven because it was a rental? I went to a tax person and they are researching it - and scaring the bejesus out of my wife and I. I remember being told (in 2012) that as we lived in the place for 2 of the first 5 years it would be included in the Mortgage relief act, but it's hard to find this clause anywhere. Has anyone dealt with this situation?
Qualified Principal Residence Debt Taxpayers may exclude income from cancellation of qualified principal residence indebtedness for discharges of debt occurring after 2006 and before 2015. The exclusion is limited to $2 million ($1 million MFS) of acquisition debt. Acquisition debt has the same meaning as acquisition debt for purposes of the mortgage interest deduction rules except that the $1 million debt limit is increased to $2 million ($1 million MFS) for purposes of the exclusion rule. Any amount excluded reduces the taxpayer’s basis in the residence. The exclusion does not apply to debt discharged on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or the financial condition of the taxpayer. The exclusion for discharge of debt on a qualified principal residence is used before the insolvency exclusion, unless the taxpayer elects to apply the insolvency exclusion instead. If a portion of a loan that is discharged is not qualified principal residence indebtedness, the exclusion is limited to the amount discharged that exceeds the amount of the loan that is not qualified principal residence indebtedness. Qualified principal residence. For purposes of exclusion from income of qualified principal residence indebtedness, a qualified principal residence has the same definition as is used for the exclusion of gain on the sale of a principal residence. [IRC §108(h)(5)]
Principal residence defined. A principal residence is the taxpayer’s main home, which is the home where he or she ordinarily lives most of the time. A taxpayer can only have one main home at any one time.
Nor will this meet the two of five years rule for the Section 121 Exclusion. Your first bet would be to look at insolvency. When did you report the disposition of the rental? Are you sure this was done properly? There were certain circumstances that could have been done then to mitigate this issue; however, not many took advantage of it. Your main bet would be insolvency at the time. it was cancelled which is something we can discuss.
I went to a tax person and they are researching it - and scaring the bejesus out of my wife and I.
I don't know the answer off the top of my head - I would need to do some research on it as well. But when you say "tax person", please tell me you did not take this to a tax shop like H&R Block or Liberty. A complicated scenario like this really requires a knowledgeable CPA or EA.
It should be clear if you google up and read they the MDRA act itself. Not a CPA, but as far as I remember the length of occupancy doesn't matter, or later use, but the fact that it was a "purchase money mortgage for your primary residence", period.
Yeah, we went to h&r block, and we are pulling our info back from them and moving on to a cpa. Funny thing is I thought the same thing as the purchase was done initially as a primary residence and that is how I read the mortgage relief act. According to h&r block we owe 40k in taxes and that is after they ran it up the flag pole to their experts. Maybe that will ultimately be the case, but not going to take this without trying to find other avenues.
This is a lesson learned why not to go crazy leveraging properties and using other peoples money. It doesn't take into account risk of the market tanking or a bad tenant. What's worse is that this isn't a bankruptable debt either. The IRS always gets their money. By the time they tack on penalties and interest, its a painful lesson to learn. Not trying to pick on you, I feel for you. You've got some tough times ahead.
good luck bud I know it will work out for you, good luck I don't see why they should come after you for the whole thing please keep us posted on what becomes thanks.
@Marty GanglerKeep in mind, if you don't qualify under the MDRA, you still do the calculations in IRS form 982 related to insolvency, to see if that helps. Of cours, your CPA will go over that.
Qualified Principal Residence Debt Taxpayers may exclude income from cancellation of qualified principal residence indebtedness for discharges of debt occurring after 2006 and before 2015. The exclusion is limited to $2 million ($1 million MFS) of acquisition debt. Acquisition debt has the same meaning as acquisition debt for purposes of the mortgage interest deduction rules except that the $1 million debt limit is increased to $2 million ($1 million MFS) for purposes of the exclusion rule. Any amount excluded reduces the taxpayer’s basis in the residence. The exclusion does not apply to debt discharged on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or the financial condition of the taxpayer. The exclusion for discharge of debt on a qualified principal residence is used before the insolvency exclusion, unless the taxpayer elects to apply the insolvency exclusion instead. If a portion of a loan that is discharged is not qualified principal residence indebtedness, the exclusion is limited to the amount discharged that exceeds the amount of the loan that is not qualified principal residence indebtedness. Qualified principal residence. For purposes of exclusion from income of qualified principal residence indebtedness, a qualified principal residence has the same definition as is used for the exclusion of gain on the sale of a principal residence. [IRC §108(h)(5)]
Principal residence defined. A principal residence is the taxpayer’s main home, which is the home where he or she ordinarily lives most of the time. A taxpayer can only have one main home at any one time.
Nor will this meet the two of five years rule for the Section 121 Exclusion. Your first bet would be to look at insolvency. When did you report the disposition of the rental? Are you sure this was done properly? There were certain circumstances that could have been done then to mitigate this issue; however, not many took advantage of it. Your main bet would be insolvency at the time. it was cancelled which is something we can discuss.