Google Groups no longer supports new Usenet posts or subscriptions. Historical content remains viewable.
Dismiss
Cancellation of debt- am I overthinking this?
38 views
Skip to first unread message
ira smilovitz
Aug 25, 2012, 9:10:13 AM8/25/12
to
Husband and wife refinance their mortgage with wife's mother as lender. Mortgage is fully executed and recorded. It's a win/win situation - borrowers get better rate than bank offering, mother receives more interest than she was earning in the bank. Fast forward a bit - mother dies. Mortgage becomes an asset of the Estate. Wife is executrix and sole beneficiary of mother's estate. The intent is to cancel the remaining balance on the mortgage and for husband/wife to own house "free and clear".
If the wife cancels the mortgage in her role as executrix, is this cancellation of debt income? (There is no 1099-C filing requirement, so the IRS might never know about it. But if it were discovered and should have been reported, there would be substantial under-reporting penalties assessed.) Does the conclusion change if the wife/executor transfers the mortgage to herself as a distribution of the Estate's assets and then cancels the mortgage since she would be both creditor and debtor?
In case it matters, this is NOT a community property state. I'm also ignoring any diffential tax effects associated with continuing monthly payments to the Estate and taking a mortgage interest deduction on the personal return while paying tax on the interest income on the Estate's income tax return.
Ira Smilovitz
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2011) - All rights reserved. >>
<< ------------------------------------------------------- >>
If the wife cancels the mortgage in her role as executrix, is this cancellation of debt income? (There is no 1099-C filing requirement, so the IRS might never know about it. But if it were discovered and should have been reported, there would be substantial under-reporting penalties assessed.) Does the conclusion change if the wife/executor transfers the mortgage to herself as a distribution of the Estate's assets and then cancels the mortgage since she would be both creditor and debtor?
In case it matters, this is NOT a community property state. I'm also ignoring any diffential tax effects associated with continuing monthly payments to the Estate and taking a mortgage interest deduction on the personal return while paying tax on the interest income on the Estate's income tax return.
Ira Smilovitz
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2011) - All rights reserved. >>
<< ------------------------------------------------------- >>
JoeTaxpayer
Aug 25, 2012, 12:58:58 PM8/25/12
to
On 8/25/12 9:10 AM, ira smilovitz wrote:
> Husband and wife refinance their mortgage with wife's mother as lender. Mortgage is fully executed and recorded. It's a win/win situation - borrowers get better rate than bank offering, mother receives more interest than she was earning in the bank. Fast forward a bit - mother dies. Mortgage becomes an asset of the Estate. Wife is executrix and sole beneficiary of mother's estate. The intent is to cancel the remaining balance on the mortgage and for husband/wife to own house "free and clear".
>
> If the wife cancels the mortgage in her role as executrix, is this cancellation of debt income? (There is no 1099-C filing requirement, so the IRS might never know about it. But if it were discovered and should have been reported, there would be substantial under-reporting penalties assessed.) Does the conclusion change if the wife/executor transfers the mortgage to herself as a distribution of the Estate's assets and then cancels the mortgage since she would be both creditor and debtor?
>
> In case it matters, this is NOT a community property state. I'm also ignoring any diffential tax effects associated with continuing monthly payments to the Estate and taking a mortgage interest deduction on the personal return while paying tax on the interest income on the Estate's income tax return.
>
> Ira Smilovitz
>
My understanding is that as long as the estate is under the limit, this
> Husband and wife refinance their mortgage with wife's mother as lender. Mortgage is fully executed and recorded. It's a win/win situation - borrowers get better rate than bank offering, mother receives more interest than she was earning in the bank. Fast forward a bit - mother dies. Mortgage becomes an asset of the Estate. Wife is executrix and sole beneficiary of mother's estate. The intent is to cancel the remaining balance on the mortgage and for husband/wife to own house "free and clear".
>
> If the wife cancels the mortgage in her role as executrix, is this cancellation of debt income? (There is no 1099-C filing requirement, so the IRS might never know about it. But if it were discovered and should have been reported, there would be substantial under-reporting penalties assessed.) Does the conclusion change if the wife/executor transfers the mortgage to herself as a distribution of the Estate's assets and then cancels the mortgage since she would be both creditor and debtor?
>
> In case it matters, this is NOT a community property state. I'm also ignoring any diffential tax effects associated with continuing monthly payments to the Estate and taking a mortgage interest deduction on the personal return while paying tax on the interest income on the Estate's income tax return.
>
> Ira Smilovitz
>
year $5.12M, there's no issue at all.
In theory, what could be messy is when the loan is significant, the
estate exemption, low, and an audit would view it as an asset. I will
contrive an example:
Estate exemption is actually $1M. The mortgage is $500K, and the $20K/yr
interest is repaid with part of the $26K/yr gift mom gives the couple.
Now, mom passes. We can't ignore the $500K. If it was gift it would
count against unified credit, if not, it's an asset of the estate, and
if it puts the estate over $1M, we can't ignore it.
/end of example.
With the exemption over $5M, there's less chance there's an issue, but
no, Ira, you're not overthinking it. With how convoluted the tax code
is, I'm afraid nothing is so simple that, when present here, would
result in that accusation.
(disclaimer - when I begin an answer with "my understanding" it means I
am not 100% of my position, and am simply offering my thoughts to prompt
further discussion. It's ok if i'm mistaken, and open to why that would
be the case.)
ira smilovitz
Aug 25, 2012, 6:45:16 PM8/25/12
to
On Saturday, August 25, 2012 12:58:58 PM UTC-4, joetaxpayer wrote:
> On 8/25/12 9:10 AM, ira smilovitz wrote:
> Husband and wife refinance their mortgage with wife's mother as lender. Mortgage is fully executed and recorded. It's a win/win situation - borrowers get better rate than bank offering, mother receives more interest than she was earning in the bank. Fast forward a bit - mother dies. Mortgage becomes an asset of the Estate. Wife is executrix and sole beneficiary of mother's estate. The intent is to cancel the remaining balance on the mortgage and for husband/wife to own house "free and clear".
>
> If the wife cancels the mortgage in her role as executrix, is this cancellation of debt income? (There is no 1099-C filing requirement, so the IRS might never know about it. But if it were discovered and should have been reported, there would be substantial under-reporting penalties assessed.) Does the conclusion change if the wife/executor transfers the mortgage to herself as a distribution of the Estate's assets and then cancels the mortgage since she would be both creditor and debtor?
>
> In case it matters, this is NOT a community property state. I'm also ignoring any diffential tax effects associated with continuing monthly payments to the Estate and taking a mortgage interest deduction on the personal return while paying tax on the interest income on the Estate's income tax return.
>
> Ira Smilovitz
> My understanding is that as long as the estate is under the limit, this year $5.12M, there's no issue at all.
>In theory, what could be messy is when the loan is significant, the estate exemption, low, and an audit would view it as an asset. I will contrive an example: Estate exemption is actually $1M. The mortgage is $500K, and the $20K/yr interest is repaid with part of the $26K/yr gift mom gives the couple. Now, mom passes. We can't ignore the $500K. If it was gift it would count against unified credit, if not, it's an asset of the estate, and if it puts the estate over $1M, we can't ignore it. /end of example.
>With the exemption over $5M, there's less chance there's an issue, but no, Ira, you're not overthinking it. With how convoluted the tax code is, I'm afraid nothing is so simple that, when present here, would result in that accusation.
>(disclaimer - when I begin an answer with "my understanding" it means I am not 100% of my position, and am simply offering my thoughts to prompt further discussion. It's ok if i'm mistaken, and open to why that would be the case.) --
Interesting... you're taking the position that the transactions are treated as a gift/transfer through estate and not as cancellation of debt. In the case at hand, there was no use of inter vivos gifts to reduce payments due mother.
> On 8/25/12 9:10 AM, ira smilovitz wrote:
> Husband and wife refinance their mortgage with wife's mother as lender. Mortgage is fully executed and recorded. It's a win/win situation - borrowers get better rate than bank offering, mother receives more interest than she was earning in the bank. Fast forward a bit - mother dies. Mortgage becomes an asset of the Estate. Wife is executrix and sole beneficiary of mother's estate. The intent is to cancel the remaining balance on the mortgage and for husband/wife to own house "free and clear".
>
> If the wife cancels the mortgage in her role as executrix, is this cancellation of debt income? (There is no 1099-C filing requirement, so the IRS might never know about it. But if it were discovered and should have been reported, there would be substantial under-reporting penalties assessed.) Does the conclusion change if the wife/executor transfers the mortgage to herself as a distribution of the Estate's assets and then cancels the mortgage since she would be both creditor and debtor?
>
> In case it matters, this is NOT a community property state. I'm also ignoring any diffential tax effects associated with continuing monthly payments to the Estate and taking a mortgage interest deduction on the personal return while paying tax on the interest income on the Estate's income tax return.
>
> Ira Smilovitz
> My understanding is that as long as the estate is under the limit, this year $5.12M, there's no issue at all.
>In theory, what could be messy is when the loan is significant, the estate exemption, low, and an audit would view it as an asset. I will contrive an example: Estate exemption is actually $1M. The mortgage is $500K, and the $20K/yr interest is repaid with part of the $26K/yr gift mom gives the couple. Now, mom passes. We can't ignore the $500K. If it was gift it would count against unified credit, if not, it's an asset of the estate, and if it puts the estate over $1M, we can't ignore it. /end of example.
>With the exemption over $5M, there's less chance there's an issue, but no, Ira, you're not overthinking it. With how convoluted the tax code is, I'm afraid nothing is so simple that, when present here, would result in that accusation.
>(disclaimer - when I begin an answer with "my understanding" it means I am not 100% of my position, and am simply offering my thoughts to prompt further discussion. It's ok if i'm mistaken, and open to why that would be the case.) --
No matter how one looks at it, the mortgage is an asset of the Estate for estate tax purposes. While the Estate assets are less than the current federal exemption, the parties are all located in NJ which still uses the 2001 federal exemption limit for the NJ Estate tax calculation. There will be some NJ Estate tax due.
Ira Smilovitz
Phil Marti
Aug 26, 2012, 6:58:13 AM8/26/12
to
On Saturday, August 25, 2012 9:10:13 AM UTC-4, ira smilovitz wrote:
> Husband and wife refinance their mortgage with wife's mother as lender. Mortgage is fully executed and recorded. It's a win/win situation - borrowers get better rate than bank offering, mother receives more interest than she was earning in the bank. Fast forward a bit - mother dies. Mortgage becomes an asset of the Estate. Wife is executrix and sole beneficiary of mother's estate. The intent is to cancel the remaining balance on the mortgage and for husband/wife to own house "free and clear".
>
> If the wife cancels the mortgage in her role as executrix, is this cancellation of debt income? (There is no 1099-C filing requirement, so the IRS might never know about it. But if it were discovered and should have been reported, there would be substantial under-reporting penalties assessed.) Does the conclusion change if the wife/executor transfers the mortgage to herself as a distribution of the Estate's assets and then cancels the mortgage since she would be both creditor and debtor?
JMO. It seems cleaner in the long run to spend a little extra up front on attorney and filing fees and transfer the mortgage asset from the estate to the daughter. Then she, as mortgagee, can file a satisfaction. No COD or gift tax issues arise.
> Husband and wife refinance their mortgage with wife's mother as lender. Mortgage is fully executed and recorded. It's a win/win situation - borrowers get better rate than bank offering, mother receives more interest than she was earning in the bank. Fast forward a bit - mother dies. Mortgage becomes an asset of the Estate. Wife is executrix and sole beneficiary of mother's estate. The intent is to cancel the remaining balance on the mortgage and for husband/wife to own house "free and clear".
>
> If the wife cancels the mortgage in her role as executrix, is this cancellation of debt income? (There is no 1099-C filing requirement, so the IRS might never know about it. But if it were discovered and should have been reported, there would be substantial under-reporting penalties assessed.) Does the conclusion change if the wife/executor transfers the mortgage to herself as a distribution of the Estate's assets and then cancels the mortgage since she would be both creditor and debtor?
Phil Marti
VITA/TCE Volunteer
Clarksburg, MD
JoeTaxpayer
Aug 26, 2012, 7:42:55 AM8/26/12
to
On 8/26/12 6:58 AM, Phil Marti wrote:
> On Saturday, August 25, 2012 9:10:13 AM UTC-4, ira smilovitz wrote:
>
>> Husband and wife refinance their mortgage with wife's mother as lender. Mortgage is fully executed and recorded. It's a win/win situation - borrowers get better rate than bank offering, mother receives more interest than she was earning in the bank. Fast forward a bit - mother dies. Mortgage becomes an asset of the Estate. Wife is executrix and sole beneficiary of mother's estate. The intent is to cancel the remaining balance on the mortgage and for husband/wife to own house "free and clear".
>>
>> If the wife cancels the mortgage in her role as executrix, is this cancellation of debt income? (There is no 1099-C filing requirement, so the IRS might never know about it. But if it were discovered and should have been reported, there would be substantial under-reporting penalties assessed.) Does the conclusion change if the wife/executor transfers the mortgage to herself as a distribution of the Estate's assets and then cancels the mortgage since she would be both creditor and debtor?
>
> JMO. It seems cleaner in the long run to spend a little extra up front on attorney and filing fees and transfer the mortgage asset from the estate to the daughter. Then she, as mortgagee, can file a satisfaction. No COD or gift tax issues arise.
Phil - I am just asking - do you agree that the mortgage value is an
> On Saturday, August 25, 2012 9:10:13 AM UTC-4, ira smilovitz wrote:
>
>> Husband and wife refinance their mortgage with wife's mother as lender. Mortgage is fully executed and recorded. It's a win/win situation - borrowers get better rate than bank offering, mother receives more interest than she was earning in the bank. Fast forward a bit - mother dies. Mortgage becomes an asset of the Estate. Wife is executrix and sole beneficiary of mother's estate. The intent is to cancel the remaining balance on the mortgage and for husband/wife to own house "free and clear".
>>
>> If the wife cancels the mortgage in her role as executrix, is this cancellation of debt income? (There is no 1099-C filing requirement, so the IRS might never know about it. But if it were discovered and should have been reported, there would be substantial under-reporting penalties assessed.) Does the conclusion change if the wife/executor transfers the mortgage to herself as a distribution of the Estate's assets and then cancels the mortgage since she would be both creditor and debtor?
>
> JMO. It seems cleaner in the long run to spend a little extra up front on attorney and filing fees and transfer the mortgage asset from the estate to the daughter. Then she, as mortgagee, can file a satisfaction. No COD or gift tax issues arise.
asset for purposes of federal and state estate tax? That was part of
what I was getting at in my example.
Stuart A. Bronstein
Aug 26, 2012, 11:56:56 AM8/26/12
to
JoeTaxpayer <JoeTa...@comcast.net> wrote:
mother leaving a note to her daughter cancels the daughter's
requirement to pay because she would be paying herself. But it is
a gift born out of affection with no consideration given in return.
It would be the same for the cancellation of debt for the
daughter's husband - it is a gift out of disinterested generosity
based on affection and without consideration. No no cancellation
of debt income under the circumstances.
___
Stu
http://DownToEarthLawyer.com
> Phil Marti wrote:
>> ira smilovitz wrote:
>>
>>> Husband and wife refinance their mortgage with wife's mother
>>> as lender.
>> ira smilovitz wrote:
>>
>>> Husband and wife refinance their mortgage with wife's mother
>>> as lender.
>>> Fast forward a bit - mother dies. Mortgage
>>> becomes an asset of the Estate. Wife is executrix and sole
>>> beneficiary of mother's estate. The intent is to cancel the
>>> remaining balance on the mortgage and for husband/wife to own
>>> house "free and clear".
>>>
>>> If the wife cancels the mortgage in her role as executrix, is
>>> this cancellation of debt income?
>>
>>> becomes an asset of the Estate. Wife is executrix and sole
>>> beneficiary of mother's estate. The intent is to cancel the
>>> remaining balance on the mortgage and for husband/wife to own
>>> house "free and clear".
>>>
>>> If the wife cancels the mortgage in her role as executrix, is
>>> this cancellation of debt income?
>>
>> JMO. It seems cleaner in the long run to spend a little extra
>> up front on attorney and filing fees and transfer the mortgage
>> asset from the estate to the daughter. Then she, as mortgagee,
>> can file a satisfaction. No COD or gift tax issues arise.
>
> Phil - I am just asking - do you agree that the mortgage value
> is an asset for purposes of federal and state estate tax? That
> was part of what I was getting at in my example.
A legitimate gift is never considered income. In this case a
>> up front on attorney and filing fees and transfer the mortgage
>> asset from the estate to the daughter. Then she, as mortgagee,
>> can file a satisfaction. No COD or gift tax issues arise.
>
> Phil - I am just asking - do you agree that the mortgage value
> is an asset for purposes of federal and state estate tax? That
> was part of what I was getting at in my example.
mother leaving a note to her daughter cancels the daughter's
requirement to pay because she would be paying herself. But it is
a gift born out of affection with no consideration given in return.
It would be the same for the cancellation of debt for the
daughter's husband - it is a gift out of disinterested generosity
based on affection and without consideration. No no cancellation
of debt income under the circumstances.
___
Stu
http://DownToEarthLawyer.com
JoeTaxpayer
Aug 26, 2012, 1:37:24 PM8/26/12
to
On 8/26/12 11:56 AM, Stuart A. Bronstein wrote:
> A legitimate gift is never considered income. In this case a
> mother leaving a note to her daughter cancels the daughter's
> requirement to pay because she would be paying herself. But it is
> a gift born out of affection with no consideration given in return.
>
> It would be the same for the cancellation of debt for the
> daughter's husband - it is a gift out of disinterested generosity
> based on affection and without consideration. No no cancellation
> of debt income under the circumstances.
Stu - my only issue here is the mortgage is an asset of the estate. If
> A legitimate gift is never considered income. In this case a
> mother leaving a note to her daughter cancels the daughter's
> requirement to pay because she would be paying herself. But it is
> a gift born out of affection with no consideration given in return.
>
> It would be the same for the cancellation of debt for the
> daughter's husband - it is a gift out of disinterested generosity
> based on affection and without consideration. No no cancellation
> of debt income under the circumstances.
it's over the limit (unlikely in 2012) it needs to be addressed, no
different than if the borrower were a third party.
Arthur Kamlet
Aug 26, 2012, 4:09:58 PM8/26/12
to
In article <XnsA0BB5AFD495AFs...@130.133.4.11>,
Stuart A. Bronstein <spam...@lexregia.com> wrote:
gifts are listed as a exception to COD income.
--
ArtKamlet at a o l dot c o m Columbus OH K2PZH
Stuart A. Bronstein <spam...@lexregia.com> wrote:
>JoeTaxpayer <JoeTa...@comcast.net> wrote:
>
>A legitimate gift is never considered income. In this case a
>mother leaving a note to her daughter cancels the daughter's
>requirement to pay because she would be paying herself. But it is
>a gift born out of affection with no consideration given in return.
>
>It would be the same for the cancellation of debt for the
>daughter's husband - it is a gift out of disinterested generosity
>based on affection and without consideration. No no cancellation
>of debt income under the circumstances.
To add: In Pub http://www.irs.gov/pub/irs-pdf/p4681.pdf - Page 3 --
>
>A legitimate gift is never considered income. In this case a
>mother leaving a note to her daughter cancels the daughter's
>requirement to pay because she would be paying herself. But it is
>a gift born out of affection with no consideration given in return.
>
>It would be the same for the cancellation of debt for the
>daughter's husband - it is a gift out of disinterested generosity
>based on affection and without consideration. No no cancellation
>of debt income under the circumstances.
gifts are listed as a exception to COD income.
--
ArtKamlet at a o l dot c o m Columbus OH K2PZH
Stuart A. Bronstein
Aug 26, 2012, 8:20:06 PM8/26/12
to
JoeTaxpayer <JoeTa...@comcast.net> wrote:
> Stuart A. Bronstein wrote:
>
>> A legitimate gift is never considered income. In this case a
>> mother leaving a note to her daughter cancels the daughter's
>> requirement to pay because she would be paying herself. But it
>> is a gift born out of affection with no consideration given in
>> return.
>>
>> It would be the same for the cancellation of debt for the
>> daughter's husband - it is a gift out of disinterested
>> generosity based on affection and without consideration. No no
>> cancellation of debt income under the circumstances.
>
> Stu - my only issue here is the mortgage is an asset of the
> estate. If it's over the limit (unlikely in 2012) it needs to be
> addressed, no different than if the borrower were a third party.
Inheritances are gift and are treated that way. The mortgage is an
> Stuart A. Bronstein wrote:
>
>> A legitimate gift is never considered income. In this case a
>> mother leaving a note to her daughter cancels the daughter's
>> requirement to pay because she would be paying herself. But it
>> is a gift born out of affection with no consideration given in
>> return.
>>
>> It would be the same for the cancellation of debt for the
>> daughter's husband - it is a gift out of disinterested
>> generosity based on affection and without consideration. No no
>> cancellation of debt income under the circumstances.
>
> Stu - my only issue here is the mortgage is an asset of the
> estate. If it's over the limit (unlikely in 2012) it needs to be
> addressed, no different than if the borrower were a third party.
asset of the estate. But the cancellation of debt came about as a
matter of law, because normally you can't owe money to yourself.
By the way, the note gets valued in the estate based on the market
value of the note (e.g. discounted value) rather than the amount
still owed on the date of death.
___
Stu
http://DownToEarthLawyer.com
Stuart A. Bronstein
Aug 26, 2012, 8:25:14 PM8/26/12
to
kam...@panix.com (Arthur Kamlet) wrote:
> To add: In Pub http://www.irs.gov/pub/irs-pdf/p4681.pdf - Page 3 --
> gifts are listed as a exception to COD income.
Right. It says (among other things relevant on this point),
> To add: In Pub http://www.irs.gov/pub/irs-pdf/p4681.pdf - Page 3 --
> gifts are listed as a exception to COD income.
"Generally, if a debt for which you are personally liable is canceled
or forgiven, other than as a gift or bequest, you must include the
canceled amount in your income."
If it's a gift or bequest, it's not counted as income.
___
Stu
http://DownToEarthLawyer.com
ira smilovitz
Aug 27, 2012, 9:58:27 AM8/27/12
to
On Sunday, August 26, 2012 7:42:55 AM UTC-4, joetaxpayer wrote:
> On 8/26/12 6:58 AM, Phil Marti wrote: > On Saturday, August 25, 2012 9:10:13 AM UTC-4, ira smilovitz wrote: > >> Husband and wife refinance their mortgage with wife's mother as lender. Mortgage is fully executed and recorded. It's a win/win situation - borrowers get better rate than bank offering, mother receives more interest than she was earning in the bank. Fast forward a bit - mother dies. Mortgage becomes an asset of the Estate. Wife is executrix and sole beneficiary of mother's estate. The intent is to cancel the remaining balance on the mortgage and for husband/wife to own house "free and clear". >> >> If the wife cancels the mortgage in her role as executrix, is this cancellation of debt income? (There is no 1099-C filing requirement, so the IRS might never know about it. But if it were discovered and should have been reported, there would be substantial under-reporting penalties assessed.) Does the conclusion change if the wife/executor transfers the mortgage to herself as a distribution of the Est
ate's assets and then cancels the mortgage since she would be both creditor and debtor? > > JMO. It seems cleaner in the long run to spend a little extra up front on attorney and filing fees and transfer the mortgage asset from the estate to the daughter. Then she, as mortgagee, can file a satisfaction. No COD or gift tax issues arise. Phil - I am just asking - do you agree that the mortgage value is an asset for purposes of federal and state estate tax? That was part of what I was getting at in my example. --
There was never any doubt in my mind that the value of the mortgage is an asset of the estate which must be included for estate tax purposes.
> On 8/26/12 6:58 AM, Phil Marti wrote: > On Saturday, August 25, 2012 9:10:13 AM UTC-4, ira smilovitz wrote: > >> Husband and wife refinance their mortgage with wife's mother as lender. Mortgage is fully executed and recorded. It's a win/win situation - borrowers get better rate than bank offering, mother receives more interest than she was earning in the bank. Fast forward a bit - mother dies. Mortgage becomes an asset of the Estate. Wife is executrix and sole beneficiary of mother's estate. The intent is to cancel the remaining balance on the mortgage and for husband/wife to own house "free and clear". >> >> If the wife cancels the mortgage in her role as executrix, is this cancellation of debt income? (There is no 1099-C filing requirement, so the IRS might never know about it. But if it were discovered and should have been reported, there would be substantial under-reporting penalties assessed.) Does the conclusion change if the wife/executor transfers the mortgage to herself as a distribution of the Est
ate's assets and then cancels the mortgage since she would be both creditor and debtor? > > JMO. It seems cleaner in the long run to spend a little extra up front on attorney and filing fees and transfer the mortgage asset from the estate to the daughter. Then she, as mortgagee, can file a satisfaction. No COD or gift tax issues arise. Phil - I am just asking - do you agree that the mortgage value is an asset for purposes of federal and state estate tax? That was part of what I was getting at in my example. --
Ira Smilovitz
ira smilovitz
Aug 27, 2012, 10:01:39 AM8/27/12
to
On Sunday, August 26, 2012 8:25:14 PM UTC-4, Stuart A. Bronstein wrote:
> kam...@panix.com (Arthur Kamlet) wrote: > To add: In Pub http://www.irs.gov/pub/irs-pdf/p4681.pdf - Page 3 -- > gifts are listed as a exception to COD income. Right. It says (among other things relevant on this point), "Generally, if a debt for which you are personally liable is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in your income." If it's a gift or bequest, it's not counted as income. ___ Stu http://DownToEarthLawyer.com --
Thanks. That's exactly what I needed - the explicit exception to the general rule of cancellation of debt being income.
> kam...@panix.com (Arthur Kamlet) wrote: > To add: In Pub http://www.irs.gov/pub/irs-pdf/p4681.pdf - Page 3 -- > gifts are listed as a exception to COD income. Right. It says (among other things relevant on this point), "Generally, if a debt for which you are personally liable is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in your income." If it's a gift or bequest, it's not counted as income. ___ Stu http://DownToEarthLawyer.com --
Ira Smilovitz
Message has been deleted
Stuart A. Bronstein
Aug 27, 2012, 12:23:06 PM8/27/12
to
"D. Stussy" <spam+ne...@bde-arc.ampr.org> wrote:
> The daughter (as executrix) should simply distribute the rights
> of the loan to herself (as beneficiary), thus becoming a "loan
> to one's self" and as such, a legal nullity with nothing to
> cancel.
It's still debt cancellation, and would be taxable if it weren't a
gift. If an agreement to transfer to loan to the debtor by will
were included in a commercial, arms-length transaction, I'd think
there would still be cancellation of debt income even though it would
be transformed into a loan to ones-self.
> The only problem that could arise: If the estate needs to
> collect something on the loan in order to pay estate tax.
> However, even that is avoided since the loan was to the
> executrix.
If there are insufficient funds in the estate to pay estate tax
without liquidating estate assets, the assets are supposed to be sold
to pay the tax. If that doesn't happen, the recipient would be
liable for his share of the tax.
___
Stu
http://DownToEarthLawyer.com
> The daughter (as executrix) should simply distribute the rights
> of the loan to herself (as beneficiary), thus becoming a "loan
> to one's self" and as such, a legal nullity with nothing to
> cancel.
It's still debt cancellation, and would be taxable if it weren't a
gift. If an agreement to transfer to loan to the debtor by will
were included in a commercial, arms-length transaction, I'd think
there would still be cancellation of debt income even though it would
be transformed into a loan to ones-self.
> The only problem that could arise: If the estate needs to
> collect something on the loan in order to pay estate tax.
> However, even that is avoided since the loan was to the
> executrix.
If there are insufficient funds in the estate to pay estate tax
without liquidating estate assets, the assets are supposed to be sold
to pay the tax. If that doesn't happen, the recipient would be
liable for his share of the tax.
___
Stu
http://DownToEarthLawyer.com
0 new messages