1099-A Foreclosure

Technical topics regarding tax preparation.
#1
BFStax  
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TP and SP were both listed on a mortgage for their primary residence, in CT. The house was built in 2001 for total cost of $505,000 and they lived their until 2019 when they divorced. The SP was allowed to live their following divorce but the legal ownership remained in both of their names as did the mortgage. The TP moved out and lived elsewhere in all future years.

In 2022, the bank foreclosed on the property and issued a 1099-A, in his SSN, for $389,000 which was the remaining amount of their mortgage. 1099-A shows FMV of $339,000 although actual FMV is between $550k-$600k. Am I correct on the following treatment:

1. TP basis in the property is $505k, less $389k debt cancellation, results in loss of $116k.
2. Property is in CT which is a non-recourse state.
3. Since property is personal use so loss cannot be taken on Sch D.

Do I even have to report the 1099-A at all anywhere on the return since it's non-recourse and personal loss?
 

#2
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Where did you get the idea that CT is a non-recourse state? I believe that CT is considered to be a recourse state because state law permits deficiency judgments in both of the foreclosure procedures available to lenders.

If the mortgage was a recourse mortgage, then the amount of the mortgage minus the FMV of the residence is cancellation of debt (COD) income. But you’ve told us that the mortgage was only $389,000 and the FMV of the residence was $550,000 to $600,000. So, it doesn’t make any sense that this house was foreclosed on since its value was more than sufficient to satisfy the debt. There are some facts missing.
 

#3
BFStax  
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NoCalCPA85 wrote:Where did you get the idea that CT is a non-recourse state? I believe that CT is considered to be a recourse state because state law permits deficiency judgments in both of the foreclosure procedures available to lenders.


My understanding of "non-recourse" is that lenders can only come after the property that secures the mortgage and nothing else (they have no recourse to recoup additional losses in excess of the property itself). Just google this and you'll find endless articles explaining how CT and 11 other states are non-recourse.

NoCalCPA85 wrote:If the mortgage was a recourse mortgage, then the amount of the mortgage minus the FMV of the residence is cancellation of debt (COD) income. But you’ve told us that the mortgage was only $389,000 and the FMV of the residence was $550,000 to $600,000. So, it doesn’t make any sense that this house was foreclosed on since its value was more than sufficient to satisfy the debt. There are some facts missing.


The 1099-A shows FMV of $339k. I don't know where they got that number from. My client tells me it's closer to $600k. Zillow shows $553k. I am not a real estate expert and short of hiring one to get true FMV (which won't even be accurate because the foreclosure happened 8 months ago), I don't know which number to use, my clients or the banks. Might the bank be using a dated FMV?

If the property is indeed worth $500k+, then it's still a foreclosure because no payments were being made and any surplus would be returned to my client. At what point is the 1099-A issued? After foreclosure sale? Before? Honestly, there might be facts missing but this is what I have to go on right now.
 

#4
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I think you’re wrong in concluding that CT is a non-recourse state.

A state is a non-recourse state if state law limits the lender’s recovery in the event of the borrower’s default to the fair market value of the property.

In Connecticut, lenders may foreclose through one of two judicial procedures called “strict foreclosure” and “decree of sale foreclosure.” Under both procedures, a deficiency judgment is permitted. See Conn. Gen. Stat. secs. 49-14 and 49-24f. By permitting a deficiency judgment, this means that the lender’s recovery is not limited to the fair market value of the property, but rather, the lender may pursue the borrower for the difference. The fact that a deficiency judgment is permitted in CT means that CT is a recourse state.
 

#5
BFStax  
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https://www.forbes.com/advisor/loans/recourse-loans-vs-non-recourse-loans/

"Home mortgages—though generally recourse—are non-recourse in 12 states: Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah and Washington. If a homeowner defaults in one of these states, the lender can foreclose on the collateralized home but cannot go after the borrower’s other assets."

Let's assume my fact pattern is correct and consider the consequences if the loan was recourse and nonrecourse. How can this be reported? My client wants to consider the higher FMV which would make this a non-taxable event.
 

#6
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In Connecticut, if the foreclosure sale price doesn't cover the balance of your mortgage loan, the lender can come after you for the "deficiency."

https://www.nolo.com/legal-encyclopedia/deficiency-judgments-after-foreclosure-connecticut.html

Connecticut is a recourse state. This means the lender that suffers a shortage in a foreclosure has the right to pursue a deficiency judgment from the borrower.

https://reidrealestategroup.com/deficiency-judgments-in-ct/

Sec. 49-14. Deficiency judgment. (a) At any time within thirty days after the time limited for redemption has expired, any party to a mortgage foreclosure may file a motion seeking a deficiency judgment.

https://www.cga.ct.gov/current/pub/chap_846.htm#sec_49-14

I believe that the mortgage was recourse. There was no COD income because the debt ($339K) didn’t exceed the FMV of the property ($553K). The debt ($339K) minus basis ($505K) results in a nondeductible personal loss.

Same result if the mortgage was nonrecourse. The debt ($339K) is the sales price. Subtract basis ($505K) and you get a nondeductible personal loss.
 

#7
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I consulted with a real estate lawyer here in NC when I had a client with a short sale, about a decade ago. He quickly disabused me of the notion that NC is non-recourse. So I'd want to see Forbes's cites for their assertion as it relates to NC. It would also make me doubt the other states on the list.
 

#8
keiser  
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A minor point for future readers: CA anti-deficiency judgment act applies to purchase money mortgages, not refinances or seconds. CCP 580b. There are other exceptions as well.
 

#9
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One additional point. You don’t have to accept the FMV of the home as reported on the Form 1099-A. To arrive at this figure, lenders will use whatever they have in the file, and often it’s an appraisal that is many years old, sometimes going back to the date of the original purchase. If you have evidence that the FMV at the time of foreclosure was different than the amount shown on the 1099-A, then use that instead.

In Martin, T.C. Summary Opinion 2009-121, the taxpayer’s car was repossessed by the lender. The lender issued a 1099-C for the entire unpaid amount of the auto loan, which effectively claimed that the FMV of the car was zero. The taxpayer was able to refute this FMV with his testimony as to the actual car’s value, which was sufficient to satisfy the unpaid debt. Since there was no COD income, the Tax Court ruled in the taxpayer's favor.
 


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