Tax Court rules “cash for keys” payment is not ordinary income.

Cash for keys payments have become fairly common in cases of struggling homeowners facing foreclosure.  To avoid a lengthy and expensive foreclosure process, many lenders offer a cash incentive to homeowners to vacate the property quickly and to leave it in good condition.  Often these lenders issue a 1099-Misc to the homeowner showing that the payment is nonemployee compensation which would be taxed to the individuals as ordinary income subject to self employment tax.  In TC Summary Opinion 2016-74 the tax court again confirms that this treatment is not correct.  In the above case, the CPA for the taxpayers included the payment as part of the sales proceeds of the property and not as ordinary income.  The IRS disagreed and assessed additional taxes against them so they went to court.  The tax court agreed with the position taken by the CPA and not the IRS.  Cancellation of debt income is a complex tax issue.  It pays to have competent tax advice from someone such as an Enrolled Agent or CPA if you are facing this issue.

Bad news for distressed CA homeowners

Governor Brown just vetoed AB 99 which would have granted tax relief to taxpayers who lost their residences in 2014 through foreclosure or short sale.  Generally, in foreclosures or short sales there is a forgiveness or cancellation of debt (COD) by the lender. This results in taxable income to the borrower unless they meet one of various exclusions in tax law.  In response to the housing crisis, our federal legislators created a temporary exclusion from COD income for anyone who lost their principal residence.  The US congress has continued this exclusion on an annual basis through 2014.  California had complied with the federal tax laws in this area, but only through 2013.  AB 99 would have extended this exclusion through 2014, but it was vetoed by the governor after passing through the state legislature.  This COD income exclusion has not been extended for 2015 (yet) by either the federal or California legislatures.  But, if you are in this circumstance, there are other exclusions that you may qualify for to avoid a large tax bill after losing your home.  We specialize in this complex area of tax law, and would be happy to assist you in determining your options if you are faced with this issue.