i am so sorry you are stuck with me but i need to get this resolved. I promise you I will compensate your time because I am going to pass along this answer on my own bill....
ok this is the first answer I received from "Robin"
However, there are two basic exceptions to this general rule:
(1) When the amount forgiven/deficiency is included in a bankruptcy filing.
2) When you are insolvent at the time the debt is forgiven.
One more exception applies if your rental qualifies as Section 1231 property. 1231 property must be used in a trade or business and held longer than 1 year. Generally, property held for the production of rents or royalties is considered to be used in a trade or business. . In this case, you may be able to reduce the cost basis of the rental property without being insolvent. The result is that you don't report the income from the debt forgiveness but you have a lower loss on the "sale' of your property. To use this strategy, you must make an election and the debt forgiven must be "qualified acquisition indebtedness," (i.e. debt incurred to acquire, construct or improve a property.)
This may be your best form of action, especially if there's only one mortgage/loan out on the property,
STop first response from Robin............
Start second answer from Lev
That is correct - following you need to report:
Form 982 - www.irs.gov/pub/irs-pdf/f982.pdf
specifically - for rental property - check the box 1(d) - Discharge of qualified real property business indebtedness
, and put the forgiven amount on the line 2 and on line 4.
You should also reduce the basis of your real property by the amount excluded. Part II of form 982 is to reduce tax attributes.
Form 4797 - http://www.irs.gov/pub/irs-pdf/f4797.pdf - is to report the disposition of business property - rental property in your situation.
To calculate your gain or loss - you will use an adjusted basis reduced by the amount of debt forgiven.
Let me know if you need any help.
Even though the sale of the rental results in a gain, it appears the tax is substantially reduced whereby the amount of gain reduced by the depreciation amount is taxed at zero percent and the balance of the gain is taxed at 10%....or $ 1450 in tax versus $5K reporting the Form 1099C as other income....and a small form 4797 loss on the sale of the rental....I guess that is why I am questioning it!
You have accepted an Answer!
Tuesday, March 20, 2012 8:41 PM EST
You do not report the canceled debt related to real estate rental property as other income.
By filing form 982 - you are excluding that amount from taxable income.
You only need to adjust the basis of the rental property.
Stop response from LEV
The original facts...Form 1099c $ 54K... Form 1099S $ 72K... Basis in the rental (before any adjustments) $ 96 Accum Deprec $ 21.......All I want to do is record the sale...originally this taxpayer was looking at report $ 54 K as Sched E income and a $ 3K rental loss or is it better to reduce basis and report the $ 51 K gain ($ 21 K at ordinary inc rates and $ 29 at cap gain rates....he has about $ 30 other income on Page 1 of the return.
So what would you like to backtrack.......based on the above.....