What losses can be deducted to offset a 1099-C for an investment property?

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I own this home since feb/06. Will I be able to deduct mortgage interest, taxes,maintenance and other expenses to any income I have to report (1099-C)? What about the downpayment I walked away from. In my case I put down 20k. My loan balance is $ 172K and properties in area are appraising for $ 172K-$ 177k. I purchased for $ 192k. I ‘ve paid about 23K in interest only payments and other expenses in my attempt to try and sell and not ruin my credit. But I’m at the end of my rope. I would like to understand all the financial consequences of doing this “deed in lieu” beside of course ruining my credit. Thanks
Sorry. The downpayment is for this house not another. Haven’t walk away from it yet.

I thought that if I had a 30 year conventional mortgage loan with a 6% fixed interest rate, then my interest rate would stay at 6% for the 30 years?

I think im wrong because I see stuff like a 60 day rate lock at the time of application. What does that mean? Does it mean that you can have 60 days to choose the best interest rate for you to lock in for the 30 years?

I thought if it was a fixed rate then it would stay at the same rate until the end of the loan.

How is “float down” on a rate used? Is that only for adjustable rates? Does it mean that if a rate is lower than you can lock in on that?

What does points mean? Is that just meaning like a rate of 5.5 moved up one point to 5.6?

Heres a example I read where they talk about points “In terms of a 60 day or 90 day lock, usually the cost for a 90 day lock is relatively small. The small price paid for a lock-in will more than offset the cost of a higher interest rate or possibly not qualifying for the loan. For example, the typical charge is an additional 1/4 POINT for a 90 day rate lock.
So if i locked in a 6% interest rate for 90 days at a fixed rate, then I would only get a 6 % rate for 3 months of mortgage payments, and then i have to lock in another rate for 90 days for 30 years?

Or can I just lock in a 6% interest rate for 30 years?
Sorry I still dont understand “Points”. I also dont understand you used a example of a ” interest rate is 4.75 fixed but the APR 4.874 %” Im confused and now im thinking i have to pay 4.75 interest per month plus 4.874 every year.

I need to learn how to read the sheet you hyperlinked . Im 22 and have $ 25,000 for a 100,000 home with a credit score of about 735 and trying to learn more about the mortgage terminology before i get a loan

8 Comments
  1. Reply
    PepsiLime
    April 29, 2011 at 9:27 pm

    Was it a rental property? If so, you should have filled out a schedule E for your 2006 tax return, and you would have been able to deduct the expenses that you have listed above, in addition to others related to the property (including depreciation). By doing a “deed in lieu” (which I have unfortunately done in the past) you are basically turning the property back over to the lender in exchange for your remaining loan balance. I’m not clear as to what the downpayment you walked away from is, is it this property or another property? If you purchased it for $ 192K and your loan balance (interest only loan) is $ 172K and you put down 20K then it would seem the downpayment you are talking about walking away from would be the 20K you would lose by doing the deed in lieu of. It seems to me though that you would have a loss of around 20K on this investment property. You bought it for 192k and would be giving it back to the lender in exchange for them forgiving your debt of 172k to them. therefore you would only lose your 20k downpayment. You would have to subtract from the 20k any depreciation that you incurred on the property. Also, just to let you know a deed in lieu does affect your credit, but not as much as a foreclosure would. One other thing you could consider doing would be seeing if your lender would allow a “short sale”. That would be them allowing you to sell the property for less than you owe them, and them not asking you to make up the shortage.

  2. Reply
    Mathew
    April 29, 2011 at 9:47 pm

    The amount on the 1099-C is ordinary income. There are no adjustments unless you have information that the number on the 1099-C is incorrect (they frequently are). If you itemize your deductions the interest you paid is deductible just as it would have been had you not gotten a 1099-C. If you rented the property and filed a Schedule E you may have some losses that will apply but that also will not change the fact that the amount on the 1099-C is ordinary income.

  3. Reply
    Mark S
    April 29, 2011 at 10:11 pm

    1099-C (Cancellation of Debt Income or COD) income is excluded to the extent you were insolvent at the time of turning the property over to your creditor.

    You are insolvent when you have a negative net worth (Liabilities are higher than Assets)

    http://www.irs.gov/pub/irs-pdf/p908.pdf

    The above link is to Publication 908 (Bankruptcy Guide)
    On page 21 it spells out under what conditions you can exclude COD and how much and what you must do afterwords.

  4. Reply
    Hank Roitman, EA
    April 29, 2011 at 10:57 pm

    OK, before we talk about form 1099C, we need to talk about form 1099-A (abandonment). If the lender does not sell the property in the same year that you abandon it, they send a 1099A showing the FMV of the property. You do not report this on your tax return. Since it is getting late in 2007 this may come into play.

    In the year the lender sells the prop, they will send you a 1099C for the difference between what you owe and the proceeds of the sale. The value of other houses in a declining market is not a good indicator, so let’s say they sell the house for $ 150k, while you owe $ 172K. The 1099C will show $ 22k as income to be reported.

    There are no deductions that are a result of this taxable event. Presumably you took the interest deduction etc in the year such expenses were incurred.

    There is an exception for bankruptcy but that may not be your best play. Someone already addressed the insolvency exception,so I won’t repeat it.

  5. Reply
    falsi fiable
    April 29, 2011 at 11:20 pm

    6% is a terrible loan rate! Even for jumbo loans your rate should be no more that 5.125% (APR 5.125%) with no points and no fees! See assumptions below.

    Locking a rate means you pay a fee/premium to guarantee an interest rate for a fixed period (typically 30 to 90 days, depending upon the fee). If underwriting or final loan approval is completed within the lock period you are guaranteed that interest rate. If you get a free float down, that usually lets you lock in a lower rate when interest rates drop. You can only lower down once.

    The lock period is how long they honor the rate during underwriting. If underwriting takes longer, the lock expires and you get current market rates. Your LOAN RATE is fixed for 30 years and does not change. If you have good credit and are dealing with a reputable lender, you only need 30 days for lock. Each 1/8% increase in interest rates adds about $ 25 to your monthly payment on a $ 300k mortgage.

    However, when interest rates are on the rise, some shady lenders may find a way to take longer than your lock period so it expires and they don’t have to honor your rate. For people with good credit and able to produce all the necessary paperwork quickly, underwriting/approval should take no more than 10 days. Lenders may tell you otherwise, but it is usually a lie. I refinanced last year with Cash Call Mortgage. You may remember those Gary Coleman ads. Yes, the same people who offer high-interest short-term loans to people with average to poor credit. Their mortgage business is VERY different. You can even see their rate sheet on-line. No other lender lets you do that.

    http://www.cashcallmortgage.com/RatesPDF.aspx

    Current 30-year rates: 4.750% 0 Points, 4.874 APR. Assumes $ 300k loan, single-family, owner-occupied, not a condo or investment property, escrow impounds, FICO 720+, LTV < 75% (25% down payment). See rate chart for add-ons. POINTS are like a fee you pay to "buy down" to a lower interest rate. For each 1 point you pay 1% of the loan amount. This is where you need to understand how the numbers work to see if it's worth paying points to get a better rate. As a general rule, the savings on your monthly mortgage payment should be low enough that your payback period for points is no more than 1 to 3 years. So if you pay 1 point on a $ 300k loan to get a rate that is 1/8 point lower, you are paying $ 3000 up front to save $ 25 per month. It would take you 10 years before your buy-down makes sense. Good luck to you!

  6. Reply
    loanmasterone
    April 29, 2011 at 11:37 pm

    The term lock your rate or rate lock simply mean that you have a certain time frame in which your interest rate would be guaranteed. So by locking your rate for a 90 day period you would have to close your mortgage loan before the 90 day lock period expired. Whatever you locked your interest rate would be the interest rate for the life of your loan or until you would refinance this mortgage loan. If your term for your mortgage loan is 30 years then this interest rate would be for the entire 30 year period of the mortgage loan.

    Failure on your part or that of your mortgage broker to complete the mortgage transaction prior to the 90 days would require you to re lock your interest rate, your new rate might be higher also you might be charged a fee for failing to complete your mortgage loan transaction within the 90 day period. There are also 30, 45 and 60 day lock periods.

    Points in your situation would be what you would pay a mortgage lender for doing your mortgage loan. A point equal 1% of your loan amount that you would pay. In your case if you are purchasing your house for $ 100,000 then 1 point would be equal to $ 1000. Therefore if you were charged 2 points for a lender to do your mortgage the cost in points would be $ 2,000. There might be other fees charged to you, these other fees would not be called points.

    The nominal APR is calculated as: the rate, for a payment period, multiplied by the number of payment periods in a year.

    However, the exact legal definition of “effective APR” can vary greatly in each state, depending on the type of fees included, such as loan processing fees, monthly or service fees, or late fees. The effective APR has been called the “mathematically-true” interest rate for each year.

    The computation for the effective APR, as the fee compound interest rate, can also vary depending on whether the up-front fees, such as origination or participation fees, are added to the entire amount, or treated as a short-term loan due in the first payment. When start-up fees are paid as first payment (s), the balance due might accrue more interest, as being delayed by the extra payment period (s).

    In some areas, the annual percentage rate (APR) is the simplified counterpart to the effective interest rate that the borrower will pay on a loan. When not using the term “effective APR”, the use of “APR” is an early term for nominal APR. In many countries and jurisdictions, lenders (such as banks) are required to disclose the “cost” of borrowing in some standardized way as a form of consumer protection. APR is intended to make it easier to compare lenders and loan options.

    This is not the interest rate as per your mortgage loan approval. Your interest rate is normally always lower than your APR interest rate. APR is basically a measurement as to the cost of your mortgage loan and all points and fees are included. Most of these are one time fees.

    I hope this has been of some benefit to you, good luck.

    “FIGHT ON”

  7. Reply
    tina.gail
    April 30, 2011 at 12:21 am

    In simple terms, when you lock your interest rate, it will be locked for 30 years. It will not change unless you choose to refinance later on.
    A 90-day lock means that you chose to lock your rate 90 days before your closing date. It will still be locked for the 30 years. 90-days is only the amount of time before your closing date.
    A 60-day lock means that you lock your rate 60 days before your closing date (most times, banks give you a better rate if you lock closer to your closing date, that’s all).

    As for the points issue, sometimes banks let you pay “points” to reduce your interest rate. If their current rate is 5%, sometimes you can pay a “point” which will be $ 1,000 cash, and your interest rate will be reduced to 4.8%, for example.
    Of course, when you think about it and theoretically average that $ 1,000 cash over the life of the loan, it’s almost like increasing your rate slightly to maybe 4.85%. That’s what the APR means. It’s the equivalent interest rate that you’re “theoretically” paying by factoring in the amount that you paid up front in points. Really, you only need to worry about the interest rate they’re giving you. Sometimes it’s worth it to pay a few thousand dollars in points to reduce your interest rate, sometimes not. It really depends on if you have the cash on hand.

    I hope this helps… Good luck!! 🙂

    Btw.. Excellent job saving $ 25,000 by age 22. You’re in great shape already.

  8. Reply
    Fangxiaof Wy
    April 30, 2011 at 1:14 am

    I help you ask

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