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Arthur Rubin
Arthur Rubin, Tax Preparer
Category: Tax
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Experience:  22 years of tax preparation experience, including individual, trust, and estate returns.
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I received a 1099-C for my rental property that I held for

Customer Question

I received a 1099-C for my rental property that I held for over 1 year. According to the worksheet provided in IRS Publication 4681 I was insolvent just prior to the debt being canceled. My question is do I JUST file Form 982 [check box 1(a)] and place the total amount of debt that was canceled (as my liabilities were higher that the total canceled)... OR do I ALSO need to report this on my Form 1040 somewhere? (the reason I ask is that I am using Turbo Tax and it when I do report it as 1099-C there is no place to show the insolvency exclusion)...meaning the program totals the 1099-C as ordinary income showing a large amount of tax owed thereon.
Thanks!
Submitted: 3 years ago.
Category: Tax
Expert:  CGCPA replied 3 years ago.

Welcome to Just Answer. I am here to help you resolve your tax and finance concerns. Please feel free to ask anytime you need extra help.

 

The problem you are experiencing is common in that many individuals confuse the statutes pertaining to this matter. Insolvency provides an exclusion for personal residence indebtedness canceled. A rental property is not your personal residence but is instead a business property. Different rules apply here. Basically you will need to select the exclusion based on a reduced tax attribute (depreciable basis). It will reduce/eliminate the depreciation and may still leave a portion of the cancellation taxable. The following link will take you to IRS Publication 4681. The information to help you through this (with examples) begins on page 10. The Publication is too large to reproduce here but you may want to read all of it. It also has useful links scattered throughout the publication to assist you.

 

http://www.irs.gov/pub/irs-pdf/p4681.pdf

 

 

Customer: replied 3 years ago.
Relist: Inaccurate answer.
Expert's answer was not accurate...IRS Publication4681 clearly states an exclusion of insovency may be used on property that I was subject to a recourse debt...he indicates it does not apply to rental properties; however, on page 4 of the Publication it clearly states that this exclusion does not apply to qualified principal residence indebtedness...no where does it state it does not apply to rental property types...
Expert:  CGCPA replied 3 years ago.
A Qualified Principal Residence is the main home in which you live. Since a rental property is not your main home, it is not, by definition a QPR and is therefore business property.
Expert:  Arthur Rubin replied 3 years ago.
I think I understand what the previous expert said, and why it is incomplete. I should be able to give a more complete answer within 8 hours, if that's acceptable.
Customer: replied 3 years ago.
The property was not held by a business. It was held in my name as an individual...Publication 4681 deals with cancellation of debt by individuals including property dealing with foreclosures and related 1099-C. Please review my original question. Just got your post about the 8 hours...that will work Thanks!
Expert:  Arthur Rubin replied 3 years ago.
OK, if it was a non-recourse loan, then you shouldn't have gotten a 1099-C, but only a 1099-S, as you are considered to have sold the property for the amount of the outstanding loan.

There's some dispute as to whether a rental is a "trade or business"; if it is, you can exclude the cancellation under checkmark 1d on form 982, with the caveat that the debt would have to be acquisition debt for it to count, and you can only exclude the debt to extent it can and does reduce the basis of depreciable property. This option would only apply to a "timely filed return", which means within the next few days, if it's a 2010 form 1099-C.

If you are insolvent after the cancellation (per the worksheet on page 6 of publication 4681), then you can still exclude the debt under checkmark 1b on form 982. However, it is a business debt for the purpose of form 982, so you need to adjust attributes according to the "any other debt" section on page 2, rather than the "nonbusiness debt" section.

Does this answer your question?
Customer: replied 3 years ago.
Please see above response I gave to the first answer...I state it is in fact "recourse debt" ...leaves me with my original questions??
Expert:  Arthur Rubin replied 3 years ago.
The other expert was only dealing with category 1e from form 982, which clearly does not apply. He didn't consider 1d (which may not apply) or 1b, which seems to apply. You're probably on your own for considering the attributes. I'll pull up TurboTax to see what it can handle.
Expert:  Arthur Rubin replied 3 years ago.
TurboTax will handle form 982 correctly, as far as I can tell.

You enter form 1099-C, then the Canceled Debt Worksheet, then the Canceled Debt Summary. If you still have cancellation of debt income transferred to the 1040, check form 982 more carefully.
Customer: replied 3 years ago.

The problem with Turbo Tax on the 1099-C entry ("Miscellaneous Income") is I can enter the amount of debt cancelled; however, there is no Form 982 entry on the software; as such (based upon review of the community comments on the topic) I must paper file my return and provide the Form 982 with it "on my own" as is suggested by th Turbo Tax community.

 

So according to Publication 4681 I can exclude the canceled debt from my income based upon insolvency just prior to the cancellation of the debt...so to my original question; do I just file Form 982 check box 1(a) then in box 2 indicated the amount of total debt that was cancelled (as this is the smaller of the amount of debt that was cancelled vs. amount I was insolvent just prior to the debt being cancelled, and file it with my printed Turbo Tax return documents OR is there anything that I will need to enter on the Form 1040 regarding the 1099-C, as I know the IRS will have this on file and likely be looking for indication on my return...unfortunately Turbo tax does not provide the answer to this as far as I could find...Thanks

Expert:  Arthur Rubin replied 3 years ago.
My personal copy of TurboTax (Home and Business 2010) has form 982 and reports that it handles it properly. I haven't checked, in detail.

It's checkmark 1b (insolvancy), not checkmark 1a (Chapter 11).

There seems to be a PLR on point that 1d would also apply to your situation, but it would have to be on a timely return. In that case, you can only exclude the amount corresponding to the adjustment of your remaining basis in the structure.

It should be noted that, if the interest of the debt is deductible on your schedule E, then the 1099-C entry should be reported on your schedule E, rather than as miscellaneous income. This may make a difference if you have a deferred rental loss, or if you have other passive losses.

If, as is likely, your copy of TurboTax handles the 1099-C "correctly" by putting it into miscellaneous income, you need to back that out, regardless of any exclusion reported on form 982. Hence, you need to modify other lines of the tax return. If you force TT to attach an itemized statement for line 21, the IRS should be able to see what you're doing. You also need to make sure that any adjustments reported on lines 4-13 of form 982 are reported on the appropriate lines of the return; for example, an adjustment on form 982 line 9 needs to be reported on Schedule D.

Arthur Rubin, Tax Preparer
Category: Tax
Satisfied Customers: 1277
Experience: 22 years of tax preparation experience, including individual, trust, and estate returns.
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Arthur Rubin
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