California 1099-c Tax Questions

Cheapie

LoanSafe Member
#1
We walked away from a mortgage in 2012, and it finally sold at auction in 2016. received a 2016 1099-C form. Box 5 was NOT checked. We're in California.

Started our taxes with TurboTax, entered the 1099-C, and in the Federal Section, it said something like "Good news. Your canceled debt is excluded from tax." But when we switched to the State section, it's showing a massive tax bill. TurboTax said California doesn't conform to federal tax laws.
Went to an accountant, and he wasn't too familiar with 1099C's and had few answers.

Did I enter something wrong in Turbo Tax? If the canceled debt is not taxable in California, then we obviously need to adjust something in how we entered the 1099-C in TurboTax.

For years, we were told (even by our real property lawyer) that due to nonrecourse status of California, we wouldn't be liable for state or federal tax. This is so stressful. Thanks to anyone who can help.
 

Moe Bedard

Call 1-800-779-4547
Staff member
Loan Safe Mortgage
#2
Hello,

The Federal Mortgage Debt Relief Act of 2007 covers the tax years 2015 and 2016. According to the Internal Revenue Office (IRS), up to $2 million of forgiven debt only on your primary residence is eligible for this exclusion ($1 million if married filing separately).

A California purchase mortgage is considered non-recourse debt.

The IRS Publication 4681 says: “Nonrecourse debt” applies to when you have owned a property that was subject to a nonrecourse debt in ex-cess of the FMV of the property, the lender’s foreclosure on the property does not result in ordinary income from the cancellation of debt.”

If you qualify, you can claim a special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.

Download Form 982 at this link, Reduction of Tax Attributes Due to Discharge of Indebtedness. File the form with your federal income tax return.

You can read more at this link: http://www.loansafe.org/home-mortgage-debt-cancellation-tax-tips
 

Cheapie

LoanSafe Member
#3
Thanks as always. It turns out that when you start to enter a 1099-C, one of the TurboTax questions is "Debtor was personally liable for repayment" And then they ask if your loan is recourse. I think I accidentally checked that we were personally liable, when I should not have. Unchecking that box made all the difference. Being in California, I know we are nonrecourse. And given that the bank did not check Box 5, I did't check it in TurboTax.
 

Moe Bedard

Call 1-800-779-4547
Staff member
Loan Safe Mortgage
#4
You are welcome Cheapie and glad to be of service. Take care!
 

Cheapie

LoanSafe Member
#5
You are welcome Cheapie and glad to be of service. Take care!
Ouch. Just got an IRS form CP2000 saying that there was an income discrepancy, and it's from the foreclosure/ debt forgiveness. It looks as if the difference between what we owed and the FMV is about $5o,000, and IRS says we owe the tax on that.
I thought I handled this correctly last year when doing our return via Turbo Tax.
At this point, the CP2000 is just a "proposed correction," and we have time to reply. I did not submit form 982 last year (because I thought TurboTax handled this without needing 982), but I'm looking into it now.
From everything I understand, we should owe taxes on forgiven debt, so my guess is we erred in the filing somehow, and perhaps the 982 will resolve this?
Thanks for any info you can provide.
 

Erik Sandstrom

Mortgage Expert - Call 1-619-379-8999
Staff member
#8
This seems to be a very common occurrence with the 1099C. I've been working with someone that received a 1099C who is trying to refinance the same property. I personally wasn't the loan officer/company he was working with to complete the refinance (quicken was the lender) and they are not allowing the refinance due to the 2nd stating they have a lien against the property and will not subordinate. I'm in the middle of researching this with our legal department as well as title.

Your situation may be much different and is on a property you no longer own (I'm guessing?) but I am curious to follow your thread, please keep us updated and I will do the same with my scenario.