Excess monies from foreclosure sale

[poisonlady7563]

I am doing my 83 year old mother in laws taxes.  She recently had a home foreclosed on her in Wilmington, NC.  there was excess funds of $116k which we are now using to take care of her since she is in assisted living.  she received a 1099-misc from the county for the excess funds causing her to have a tax debt of $26k for the federal and $6k for state.  I know that you can have a tax exemption on selling a house up to $250k but this was not a tradidtional sale and the way that the monies were reported are not the same.  is there anything we can do to lower the tax bill.  i know we can do a payment plan and if we have to we will.  but i am also wondering that is we do have this huge bill can she apply for forgiveness.  i used to work in the field and know all about it so i do not need help preparing forms and all.  the money is in my husbands seperate account that is used specifically for her needs and living costs at the facility.

[JamesG1]

Even a foreclosure may qualify for a sale of your main home.  Your mother may qualify for the first $250,000 in gain on the sale of the main home being tax-free.

IRS Publication 4681 page 4 states:

Recourse debt

If you owned property that was subject to a recourse debt in excess of the fair market value (FMV) of the property, the lender's foreclosure or repossession of the property is treated as a sale or disposition of the property by you and may result in your realization of gain or loss.

That income is free and clear as long as:

• You owned the home
• It was your main home for two years or more within the five years leading up to the sale
• You waited at least two years between selling your primary home and excluding your first $250,000 or $500,000 from taxes. In other words, you may buy and sell as many primary homes as you'd like, but you'll only get this tax benefit every two years.

In TurboTax Premier or above, follow these directions.

• Down the left side of the screen, click Federal.
• Down the left side of the screen, click Wages & Income.
• Scroll down to Less Common Income, click Show more.
• Click Start to the right of Sale of home (gain or loss).
• Follow the directions.

See also this TurboTax Help.

@poisonlady7563 

[poisonlady7563]

the issue is that we had to move her out in september of 2018 after hurricane florence and the fact that she was attacked in the home by a family members boyfriend so she is about 2 months short of the 5 years (by the time we did a residency change).  she is now in assisted living.

[poisonlady7563]

also, the house was initially forclosed on in 2019 or 2020, but the original sale the buyer backed out.  and because of covid the foreclosure was put off until 2022.  so i am not sure if she qualifies based on the years.  also, she received the form on a 1099misc and not a 1099s.  we did receive a 1099a

[DMarkM1]

There may be some potential reductions in the taxable gain.  First, you mention she is in assisted living at this time.   Therefore it appears she had at least 12 months in the home prior to the sale in 2022 and any time in a licensed assisted living facility in the five years prior to sale counts toward the 24 months of residency rule.  So she may meet the full exclusion using those months.

If not, she could qualify for a partial exclusion based on the health or unforeseeable events exception.  

Here is Publication 523 for reference.  Check the eligibility step 3 -Residence paragraph "If you become physically... unable to care for yourself."  Also see the "Partial Exclusion" section. 

On another aspect you may need clarification on how the sale/proceeds are being reported.  It's strange that there was a 1099A for debt cancellation and then proceeds sent for something related to the home/sale on a form 1099Misc.  

[poisonlady7563]

in the state of nc you have to hire a lawyer and go in front of a judge to get those excess funds.  the home was originally foreclosed on in 2019 and the original buyer pulled out.  because of covid the process was put on hold till 2022 when it sold.  so i dont know exactly when the 5 years technically starts.  we had to pull her out of the house because of her health and the storm.  she lived indepententaly for 4 years till we put her in the assisted living this past october.  

[DMarkM1]

Starting counting back from the date of sale.  So the date it actually sold is the trigger.  

[poisonlady7563]

so if it sold in july 2022, i count back to july of 2017?  do you think i can get an exemption because of the attack and the hurricane damage?  she left the house in sept/oct 2018

[DMarkM1]

I'm not counting 24 months but I do count 15 for a partial exclusion.   Since her assisted living time was after the sale that won't be a factor.   The math then would be 15/24 = .625.  .625 x 250K = 156,250 max exclusion.  TurboTax will step you through the partial exclusion calculation.  

Also keep in mind the exclusion is on the gain if any on the sale.  The TurboTax interview  "Home Sale" topic will step you through the process.  Generally, what did she originally pay for the home plus any major improvements to it over the years is her cost basis.  You then would take the sales price of the property and subtract any selling costs (like commissions/fees) and subtract her basis to arrive at any gain.   

[poisonlady7563]

she purchased the house in 1971 at $25k.  the loan was gotten in 2012 as an equity loan.  the total sales price was $153k but she only got $116k from the sale

[DianeW777]

The IRS has a short information piece which does lead you back to IRS Publication 4681 as provided by @JamesD1.  

• Foreclosures and Capital Gain or Loss  (Use the worksheet to figure out the actual sales price.)

The worksheet is included to help you figure out the actual gain and it doesn't always matter what you actually received in the foreclosure.  The IRS Publication 523 describes a Health Related Move.

Health-Related Move: 

You meet the requirements for a partial exclusion if any of the following health-related events occurred during your time of ownership and residence in the home.

• You moved to obtain, provide, or facilitate diagnosis, cure, mitigation, or treatment of disease, illness, or injury for yourself or a family member.
• You moved to obtain or provide medical or personal care for a family member suffering from a disease, illness, or injury. A family member includes your:
• Parent, grandparent, stepmother, stepfather;
• Child (including adopted child, eligible foster child, and stepchild), grandchild;
• Brother, sister, stepbrother, stepsister, half brother, half sister;
• Mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-law;
• Uncle, aunt, nephew, or niece.
• A doctor recommended a change in residence for you because you were experiencing a health problem.

The above is true of your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence.

@poisonlady7563 

[poisonlady7563]

So does the attack count. She was not able to care for herself at that time because of a broken wrist and orbital socket. We have since found out She has severe ptsd from the attack as well as schizophrenia and is starting dementia 

[ShirlynW]

The information provided by @DianaeW777 and @JamesD1 is extremely helpful.

Yes. The attack would count. In Pub. 523, the section, “Other Facts and Circumstances” it states:

Even if your situation does not match any of the standard requirements described above, you still may qualify for an exception. You may qualify if you can demonstrate the primary reason for sale, based on facts and circumstances, is work related, health related, or unforeseeable.

Important factors are: 

• The situation causing the sale arose during the time you owned and used your property as your residence.

[poisonlady7563]

what about the money being reported on a 1099misc from the county and not on a 1099s.  

i have worked in tax resolution and know a bit about getting documents and i do have a whole file showing that this was excess money from sale of home.  it is just when i put it in turbotax it is showing that we owe $26k becaise of the 1099misc

[MarilynG1]

Go through the Home Sale section first to see if you qualify for a Partial or Full Exclusion on the home sale proceeds.   Type 'home sale' in the Search area, then click on 'Jump to Home Sale'.  If  TurboTax asks why you moved, choose 'Health' as the reason (this is for a partial exclusion).  If you qualify for the Full Exclusion, you won't even be asked. 

If TT says you qualify for a Full Exclusion, make an adjusting entry in the 1099-Misc section with notation 'home sale exclusion' to offset the 1099-Misc income.

If TT says you qualify for a Partial Exclusion, enter that amount as an adjusting entry in the 1099-Misc section. 

Save the documentation that proves the 1099-Misc income was for home sale proceeds. 

Here's more info on the Home Sale Exclusion.