However, over time, there have been a lot of variations made on ROI with many real estate investors using their own variation that is more meaningful for their personal case.

The basic ROI is calculated by dividing your annual return on the property (income) by the total property investment.

First determine your total “return” or profit on the property. In this case, you do not subtract the principal payment. You are looking at the true net income or loss from the property. Some people adjust the return for the tax effect (either tax savings or tax cost as a result of the investment.) Others factor in sales profit if the property is sold in the year.

Then divide the annual return by the total cost of the property, down payment plus loan amount. There is another variation that calls for you to use only cash flow in the first return calculation and then to divide it by cash only as the investment.

If you use an ROI comparison between your investment and others, make sure you are using the same formulas. There appear to be almost as many variations of how to calculate ROI as there are investors.

Rumor has it (I’ve yet to see anything authoritative from the IRS about this) that the IRS auditors are taking the position that Form 1099-As are all they need in some cases to assess cancellation of debt income.

Please look at the last blog article I posted “IRS Quietly Issues New Instructions for Reporting When You Dump Bad Real Estate” for a quick synopsis of how it is supposed to work.

The problem is that the lenders aren’t issuing Form 1099-Cs like they are supposed. I’m not sure that’s why the IRS is now relying on Form 1099-As to report COD income, but I suspect it is.

If you receive a Form 1099-A that shows the loan is non-recourse to you, or if the property is in a state that is non-recourse then you will likely have Cancellation of Debt income. The problem is that in most cases the values given on the Form 1099-A are ridiculous. We tend to see amounts that are hundreds of thousands of dollars more than fair market value or $0. It’s all or nothing and neither is right.

In reality, fair market value is determined by what a willing buyer and a willing seller determine it to be. So a lender’s guess isn’t necessarily going to be accurate anyway.

And finally, the question of recourse or non-recourse isn’t a simple yes-no. In most states it depends on the type of mortgage and the type of foreclosure. A lawyer needs to make that determination. For the person who has just had their real estate portfolio decimated and likely exhausted personal resources just trying to stay afloat, getting the advice of a lawyer and a CPA with experience in real estate matters and particularly this issue, may be too much.

Those are all the reasons why I don’t like the position that the IRS is taking on some audits. I suspect they are taking this position just to see what happens. If they get challenged and lose in Tax Court, they’ll roll back. Meanwhile, if you’re one of those people who got Form 1099-As and never got a Form 1099-C, you may be soon getting an audit notice.