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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28081
Experience:  Taxes, Immigration, Labor Relations
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A couple purchases a time share & can no longer continue the

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A couple purchases a time share & can no longer continue the payments. A deed in lieu is to be executed between the couple & the lender. The amount of debt to be cancelled is 46,000 & the fmv of the property is 60,000. The couple's basis is 6,000. The lender will be issuing a 1099-C showing these amounts. Is there any taxable income to be reported by the couple?
Submitted: 5 years ago.
Category: Tax
Expert:  Lev replied 5 years ago.


Hi and welcome to Just Answer!
The disposition of the property will be treated as a sale at FMV.
The rest of cancelled debt will generally be included into taxable income unless insolvency exception may be used.

If insolvency exception may NOT be used - the couple will have long term capital gain $54,000 and ordinary income $46,000

If insolvency exception MAY be used - part of cancelled debt will reduce the basis - but not below zero - thus - the couple will have a long term capital gain $60,000.

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Customer: replied 5 years ago.
If the insolvency exception may be used, why does the couple have to pay l-t capital gain of 60,000? Does the principal paid in the note increase basis?
Expert:  Lev replied 5 years ago.

When you claim insolvency exemption on the form 982 - - we also have to provide a reduction of Tax Attributes - means the basis have to be reduced by the amount of debt forgiven - but not below zero - in your situation that will be reported on the line 10a.
So the basis will be adjusted to zero.


The capital gain will be determined as $60,000 (assumed selling price) - zero (adjusted basis) = $60,000.

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