Scrutiny of CPA Exam Review About Tax Consequences of Home

In recent years, accountants have found considerable need to recall details from their CPA review courses about the tax impact of home foreclosure. Future CPAs are likely to find further opportunities for applying this knowledge. According to a report on CNN, the number of home foreclosures is rising and they are occurring for as little as $400 in unpaid property taxes. To simplify the multitude of factors covered in CPA study material about foreclosed property, students begin by understanding that a foreclosure is treated like a sale for tax purposes. This necessitates calculation of a gain on loss on the property sale. The first challenge in this matter is determining the amount realized by the so-called seller. Just as a careful reading of facts is required to answer CPA exam questions about foreclosure, the same attention is demanded when assessing foreclosures encountered in tax work. A temptation to simply consider the price paid at a foreclosure auction as the owner’s sale proceeds is sometimes incorrect. This is only the right figure if the loan gives the lender full recourse. These are loans where the lender can pursue the borrower for any loan balance not satisfied by seizure and sale of the property. Conversely, a non-recourse mortgage makes the purchase price at foreclosure irrelevant. In such cases, the amount realized by the foreclosed borrower is the full balance of the mortgage loan. Budding accountants should exercise care if information in CPA exam study reveals that a mortgage is non-recourse. They will also need to remember this when encountering such situations while working for taxpayers. Instances of non-recourse loans can never result in taxable income for cancellation of debt. This brings up the second part of foreclosure on a recourse mortgage. The borrower may have income from forgiven debt if the lender decides not to pursue the available recourse. That step is an addition to the gain or loss determined by subtracting the borrower’s basis from the price at the foreclosure auction. A few other considerations arise in the study of foreclosure tax consequences. As expected, basis is affected by any tax depreciation taken. The result is a possibility of Section 1250 gain from depreciation recapture along with any capital gain. Some other elements about foreclosure from CPA exam review concern the type of property. Specifically, primary residences receive special considerations. A gain from foreclosure on a main home is excluded from taxable income, up to certain limits. Any losses created by foreclosure of primary residences are not tax deductible. Lastly, attention is called for when borrowers have redemption rights following a foreclosure. Only when the redemption period ends is the tax result of the foreclosure recognized. This creates a planning opportunity because a borrower can waive his redemption right to realize a loss in the year of foreclosure. Alternatively, the borrower can delay the tax treatment by retaining the redemption right. IRS Circular 230 Disclosure Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Source: http://fastforwardacademy.blogspot.com/2012/08/scrutiny-of-cpa-exam-review-about-tax.html

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