Posted by David Butler on January 08, 2001 at 15:25:06:
Based on my understanding of the information you have just provided, it would appear that you are purchasing the property from the Payor for $5,000 plus the amount owed on the second loan and the curing amount. In my estimation, the Payor will have a taxable gain on the differences, by way of the debt relief over and above his tax basis in the property. However, if it is his personal residence, and he has lived in the home for at least two of the past five years, this amount appears to fall under the exclusionary rule as far as his tax liability.
With a normal purchase, the $5,000 cash you are giving him is just purchase money… and here too, that appears to be all it is, so a 1099 is not necessarily in order. However, the debt relief portion you are using can be looked at in two different ways.
I suggest you speak to your accountant to see whether you need to 1099 him on that, or whether his tax man simply needs to account for it in doing the offsets involved in the transaction in preparing the Payor’s next tax return…
Hope that helps,
David P. Butler