Can this be right? Do I report it as such?
Banks do what is best for them. If this was a non-recourse loan there should not be a tax effect. The bank wants to write off as a deduction as much as they can, and it doesn't help them if they took back a $500,000 property on which they compromised a $400,000 mortgage to $300,000 in a short sale. Using these numbers purely as an example, it would appear on the books as if someone was being benefitted. Bank is trying to show an immediate write down of the loan and its triggering date. They toss in $0 as if to say "we had a really good excuse to take this loss NOW."
Both FTB and BOE play games against taxpayers regarding "when" it was proper to take a write-off. Since matters proceed based upon a given year, a denial of a deduction in one year is not accompanied by a clear indication that it could be taken in another year.
The point here is that YOU have to report and take positions based on your understanding and your position. If you have better data, correct them by explanation and send it in. Beware professional filing services who file electronically as your explanations may not eventually make it to the taxing authority. Set up your facts and your position and report it by physically sending it in. Keep a record. Don't know if your short sale will be subject to a later deficiency judgement. Have someone take a close look at everything to try and discover whether you may have cancellation of debt income from the 1099C and circumstances surrounding the short sale (including the need to reduce tax attributes in other property you own, if applicable). You need to set this up right, because you may be fighting the bank, the IRS and the FTB in future. April 18 is a few days away. Get help NOW, before you file your taxes for 2010.
Curt Harrington Patent & Tax Law Attorney Certified Tax Specialist by the California Board of Legal Specialization PATENTAX.COM This communication is general information and not legal advice, and does not create an attorney-client relationship. This communication should not be relied upon as any type of legal advice. Please note that no attorney-client relationship exists between the sender and the recipient of this message in the absence of either (1) a signed fee contract and (2) remission of an agreed-upon retainer. Absent such an agreement and retainer, I am not engaged by you as an attorney, nor is any other member of my law firm.
It depends on what is in box 2, Cancellation of Debt Income. The FMV of the property may be looked at as the FMV-the debt but it cannot be correct. Either way, file form 982. See a tax professsional.
Disclaimer of California Attorney. Laws differ from state to state. Although the above response is believed to be accurate, it should not be relied upon as any type of legal advice because the information provided is incomplete. It is intended to educate the reader and a more definite answer should be based on a consultation with a lawyer. No attorney client relation is formed with me without a written contract.
Good Luck starts with a strategy and a plan.
Robert J. Suhajda, MS,CPA
17721 Norwalk Blvd. #43
Artesia, CA 90701
See a tax professional. The income from debt relief may not be taxable if the loan was non-recourse, you were bankrupt, you were insolvent, and/or this was your principal residence.
Any individual seeking legal advice for their own situation should retain their own legal counsel as this response provides information that is general in nature and not specific to any person's unique situation. Circular 230 Disclaimer - Advice given in this response cannot be used to eliminate penalties with the IRS or any other governmental agency.