USA American individuals revenue Q

[Seanynap]

Have a client who tried to refi 3 years back and it failed. Was a personal refi. Ultimately bank admits it should have been approved
last week he received a check for 56k+, representing the lifetime savings of the Lon should it had been approved. (Ie they are disbursing cash to makehim hole)

not a result of litigation
Not a result of class action
Just the bank admitting error.

I can’t find any code or precedent on this.
do we have a taxable gain ? Normally a refi does not result in a gain.

plz help! Bank can’t tell us if a 1099 will be issued

 

[Seanynap]

Using phone so apologies on auto text grammar. The nyc subway is rough

 

[DrStrangeLove]

Have a client who tried to refi 3 years back and it failed. Was a personal refi. Ultimately bank admits it should have been approved
last week he received a check for 56k+, representing the lifetime savings of the Lon should it had been approved. (Ie they are disbursing cash to makehim hole)

not a result of litigation
Not a result of class action
Just the bank admitting error.

I can’t find any code or precedent on this.
do we have a taxable gain ? Normally a refi does not result in a gain.

plz help! Bank can’t tell us if a 1099 will be issued

The money that he got--was this supposed to represent the difference between the interest he is actually being charged on his current loan versus the interest that he would have been charged on the refinance loan? I'm asking because it doesn't sound like a gain as much as a reduction in the interest cost on the loan.

It sounds like it could be analogous to seller-paid points. In that case, the money would be a reduction in the sales price and not interest. That would reduce your client's basis in the home, but may not be a taxable gain now. Check out IRC Sec. 163(h) on home mortgage interest and Reg. 1.163-10T(j) on qualified residence interest, and see if that gives you any help. Warning: The regulation is temporary, so it may change by the time your client files.

On the other hand, the amount paid by the bank might be a reduction in net interest changed by the lender, and the lump sum would have to amortized over the life of the loan, with each year's amortization netted against the interest deducted.

Your best approach might be to talk to a tax attorney, look at some case law, and take a (disclosed) position on the next return filing.