Please read this answer from the one expert...apparently there are three exceptions.....Quote....
Different expert here.Debt forgiveness income is the difference between the loan amount at the time of the foreclosure or short-sale and the market price or sale price. While Congress did provide tax relief for debt forgiveness income related to a principal residence, debt forgiveness income continues to be taxable for rental properties.
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, Please see below:Section 1231 Gains and Losses
I hope this helps. End Quote
Tuesday, March 13, 2012 4:33 PM EST
Are you saying that if I lower my cost basis in the property from $96 K by the amount of the cancelation of debt which is $ 54 and "sell" it changing the $ 2,071 ordinary loss into a $ 51,299 capital gain, I can change the taxed owed from $ 5K to Zero on Schedule D because it is Section 1231 gain on Line 6 of Form 4797 now. And I can do that because it is rental property that has been held since 2006. That gain flows to Sched D Line 11 which is excluded from cap gains tax??? for what reason does it work that way???
I ask very specific questions and my original question outlayed all the figures asking how to report it on the return....addit info is the taxpayer is not in bankruptcy nor is insolvent but has held the prop and reported income most of the years since 2006.
Also won't the IRS be looking for the 1099c i other income, how do theyknow you are leecting this basis reduction and can you use the entire Form 1099c figure...Sorry this is my first 1099 C situation.
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Tuesday, March 13, 2012 9:18 PM EST
That's ok....they're confusing to say the least.
Yes, as long as the forgiveness of debt is for the acquisition of the property (they haven't refinanced ) . If that is the case, then you may lower the cost basis of the property by the 1099C amount (similar to lowering the basis for depreciation) which gives you more of a gain on the sale.
You must identify that you are making the election under Section 1231. Depending on what software you have, you may either include a note on line 21 (where IRS would look for the 1099C amount) stating something similar to 1099C 1231 election and taxable amount
$0, or you may have to include a statement to that affect.
I hope this helps
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