Hello,
I have a 1st and 2nd with the same bank. My mortgage bank contacted me and offered to modify my ARM 1st Mtg to a fixed rate and forgive $200k. We did it and received a 1099-c for the $200 with my tax id and one for $200 with my wife's tax id (same loan number on form).

A few questions:
1) I called the bank and they told me they had to send a 1099-c to each of us. There's no problem with this? Don't want the IRS seeing two and thinking it was $400k.

2) How do I know if this is recourse or non-recourse liability? (I assume it is non-recourse) Also, is the liability amount the total of both the 1st and second or just the 1st that was modified?

3) Some of the loan was used for consolidation. So that will reduce the amount of Qualified Primary Residence debt (a bit) that I can exclude.

We were also Insolvent by about $150k at the time of the modification, due to the nearly 50% reduction in our property value.

a) Best to claim QPR exclusion first and Insolvency for any balance?
b) Any negative to either exclusion?
c) Any trouble with mortgage interest deduction once posting non-QPR debt portion?
d) Any tips on avoiding "red flags"?

4) What is the Basis of the Principle Residence before reduction (Purchase price plus improvements?), basis reduction (amount excluded as Qualified Primary Residence, not Insolvency Exclusion?) and basis after reduction (this is not necessarily the same amount as your Fair Market Value?) ?


Thanks

“I have a 1st and 2nd with the same bank. My mortgage bank contacted me and offered to modify my ARM 1st Mtg to a fixed rate and forgive $200k.”---> The much-publicized Home Affordable Modification Program, which offers financial incentives to encourage lenders to lower the mortgage payments of struggling homeowners, only works with first-mortgage loans. The only way to modify a second home mortgage is through a mortgage refinance. Even then, you'll have to get the permission of the holder of the second mortgage.
“1) I called the bank and they told me they had to send a 1099-c to each of us. There's no problem with this? Don't want the IRS seeing two and thinking it was $400k.”----> Attach a copy of each 1099C to your return and a statement explaining that the total cancelled debt is 200K for the transaction instead of 500K. You neeed to file your return as it should be done using the correct amount instead of the doubled figure. You can let IRS correct your lender.Your creditor is required by law to issue a 1009 C to any individual that settles a debt or has a debt written off that is in excess of $600.
“2) How do I know if this is recourse or non-recourse liability? (I assume it is non-recourse) Also, is the liability amount the total of both the 1st and second or just the 1st that was modified?”--->I guessso; most mortgage loans are non-recourse loans; a non-recourse loan means that your lender has only your property as security for their loan.They have no other way to obtain repayment of the principal and interest in the event something happens and your home is not worth enough to pay off the obligation including all interest and fees.
“3) Some of the loan was used for consolidation. So that will reduce the amount of Qualified Primary Residence debt (a bit) that I can exclude.”--->I guess it also depends; as long as Debt consolidation involves a secured loan against an asset that serves as collateral, most commonly a house. In this case, a mortgage is secured against the house. The collateralization of the loan allows a lower interest rate than without it, because by collateralizing, the asset owner agrees to allow the forced sale (foreclosure) of the asset to pay back the loan. The risk to the lender is reduced so the interest rate offered is lower.You MAY contact your lender for more info in detail.
“We were also Insolvent by about $150k at the time of the modification, due to the nearly 50% reduction in our property value. “--->You may exclude only $150K of the $250K debt cancellation from income because that is the amount by which it was insolvent. It must also reduce certain tax attributes by the $150K of excluded income. The remaining $250K of canceled debt must be included in income.
“a) Best to claim QPR exclusion first and Insolvency for any balance?”--->I guess it depends on the situation; in most cases, QPR exclusion does not apply to a cancellation of debt in a title 11 bankruptcy case. If qualified principal residence indebtedness is canceled in a title 11 bankruptcy case, you must apply the bankruptcy exclusion rather than the exclusion for qualified principal residence indebtedness. If you were insolvent immediately before the cancellation, you can elect to apply the insolvency exclusion (as explained under Insolvency, earlier) instead of applying the qualified principal residence indebtedness exclusion if your home equity line of credit is cancelled in whole or in part, by foreclosure, short sale or restructuring, the amount cancelled or forgiven will be ALSO considered income in the year in which the cancellation occurred. The Mortgage Forgiveness Debt Relief Act of 2007 will not exclude any portion of the home equity line of credit unless it too was used for substantial improvement of the home.
Please visit the IRS Website: Publication 4681 (2009), Canceled Debts, Foreclosures, Repossessions, and Abandonments
“b) Any negative to either exclusion?“c) Any trouble with mortgage interest deduction once posting non-QPR debt portion?”“d) Any tips on avoiding "red flags"?”--->NOT SURE.
“4) What is the Basis of the Principle Residence before reduction (Purchase price plus improvements basis reduction (amount excluded as Qualified Primary Residence, not Insolvency Exclusion?) “--> In general, you can determine the tax basis for your personal residence like this; Your original purchase price, plus closing costs,i.e. broker’s fee or other fees plus capital Improvements, NOT repair costs, you have made to the property.
“and basis after reduction (this is not necessarily the same amount as your Fair Market Value?) ?”---> The amount excluded reduces the taxpayer’s cost basis in the home. As in the case above, the adjusted basis of your property is reduced by 150K.