The 1099 form is so well recognized and imbued with authority that it is used by scammers to authenticate their scheme. But it’s really dangerous when genuine 1099’s are just plain wrong. And according to Bill Purdy, my go-to resource on this issue, 1099’s are often wrong.
When a non recourse loan is foreclosed, no matter what the spread between the amount of the debt and the fair market value of the property, no cancellation of debt income results. Period. If there was no personal liability on the loan, there is not even a theoretical improvement to the borrower’s balance sheet when the collateral is foreclosd.
Non recourse debt might be statutorily non recourse, as the purchase money non recourse provisions of California law; it may be non recourse by reason of a bankruptcy; or it may be non recourse because the collateral was acquired subject to the lien.
But neither the foreclosure servicers nor the banks are sensitive to or knowledgeable about personal liability as the trigger for cancellation of debt income.
The take-away for me was the need to dig behind each 1099 before concluding that I needed to have the client complete the IRS form to calculate whether COD income is includable in income.