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PDtax
PDtax, CPA firm owner
Category: Tax
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Experience:  32 years tax experience, including four years at a Big 4 firm.
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Got my 1099-C for short sale in 2012.....I have always done

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Got my 1099-C for short sale in 2012.....I have always done my own taxes, but I need help here. Need to know what forms for this. So far, my research shows 982 and 4797?

Bought in 2007, sold in 2012. Original cost 299m, sold for 115m, fmv 114m, depreciation 28m, 1099-c for 104m. NOT insolvent, not personal home. Condo unit was rented just about the entire period....2008 on. Using Turbo tax, but had to pull down 982 form....no instructions. Need help completing.
Submitted: 1 year ago.
Category: Tax
Expert:  PDtax replied 1 year ago.

PDtax :

Welcome to the site. I will be helping you today.

PDtax :

To Q & A...

Expert:  PDtax replied 1 year ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

What happens now?

If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below.
Expert:  PDtax replied 1 year ago.
Hi Larry,

Since you report that you are not insolvent, but just made a bad investment, it is possible that there won't be relief for you. You need to verify that you are eligible to obtain relief first, otherwise the form is not needed.

The form and instructions are located at this link (http://www.irs.gov/pub/irs-pdf/f982.pdf). Review the requirements under qualified real estate business indebtedness to see if you qualify for relief. If you do, confirm that and I will assist further.
Customer: replied 1 year ago.

I think I need to talk to an expert in this.... I was hoping you would be that. I have read that doc before. I assumed that because it was rented for the last 4 years, it was a business. Since I need to verify that and you cannot help me, I will end this. I cannot give you an OK for what you have told me. Thanks anyway.

Expert:  PDtax replied 1 year ago.
I can't give up that easily. The answer to your problem is spelled out in IRS publication 4681 (link: http://www.irs.gov/pub/irs-pdf/p4681.pdf). On page 7, they give an example of a property that qualifies as real estate business indebtedness. Your rental property does qualify. (see page 7 of that publication).

Form 982 allows you to reduce tax attributes instead or recognizing COD (cancellation of indebtedness) income. The relief would come only if you qualify (you do) and if you have tax attributes to reduce (your basis in the asset).

The form allows you to elect this treatment, which must be done on a timely filed 2012 1040. Page 10 of the publication goes over the ordering of attribute reduction.

Sorry I didn't get to the specifics in my first response. Please review the publication, especially the noted pages, and review your tax situation. I will be glad to assist further.
Customer: replied 1 year ago.

Thanks for not giving up so easily. Smile


 


I have spent considerable time on this....you have no idea. I have read 4681 multiple times. They give a bunch of examples, but none that are exactly like mine. But...here are more facts. We never lived in it. It has always been rented. I have filled out schedule E for the last 4 years to report rental income, expenses, depreciation, etc. I am pretty sure (pub 4681) that this is a business expense....and now loss.


 


I found previously a "similar" answer on www.justanswer.com. Here is the link. Very similar, but I just couldn't quite figure it out because they kept changing the numbers involved. Do I need 4797? Read this one:


 


http://www.justanswer.com/tax/6aato-short-sales-rental-property-1099-205k-fmv-100k.html


 


Let me know what you think. Form 982 seems fairly easy. Fill in line 2 with my 104m and then line 4, I believe. But after that, I am not sure after reading the one above.


 


Larry


 


 

Expert:  PDtax replied 1 year ago.
You will need 4797.

I have to step away from office, back tonight if you can wait for me. If not, opt me out and your question will be returned to the queue for other Experts.

Thanks from Just Answer/Pearl.
Expert:  PDtax replied 1 year ago.
Hi again, and thanks for your patience.

982 does, as you have read, two things. One, you can use it for tax non-recognition if you qualify, such as for a homeowner with a second mortgage that the bank forgives, but the homeowners did not sell. The second is the formula for reduction of tax attributed before a sale, which is your situation.

Your debt forgiveness will be used to reduce the tax basis of the property you purchased, as follows:

Purchase price - debt forgiveness 1099 = new basis in property. Then you take that to 4797 to determine gain/loss, with depreciation recapture and gain/loss at that point.

The 982 will allow you to follow the example on page 7 of the publication 4681 ( http://www.irs.gov/pub/irs-pdf/p4681.pdf) I mentioned above. Just use 982 for the basis reduction, and then take the sale transaction to form 4797, page 2 for gain/loss determination.

We can only offer general advice here at JA, but the example I cited applies to you, since you do qualify for the real property business indebtedness relief and the example Curt uses in the publication.

This relief converts the debt forgiveness from ordinary to capital, if appropriate, and is subject to the lower capital gains rates (after the depreciation recapture).

Please try the 982 form, following the example to elect to reduce the basis in your sold property. You will not need to complete much of the form, just the basis reduction, which will carry over to your 4797.

Thanks again from Just Answer/Pearl.
Customer: replied 1 year ago.

First let me thank you for YOUR patience! Tax forms are a "strange breed" to me.


 


Before your answer above, I used my Turbo Tax to enter MY numbers to see what I would get. I put the 104m forgiven on form 982 and TT put that on my 1040 line21 Other Income as "Cancelled debt income".


 


On 4797, I put the 299m cost - 29m depreciation - 115 sale price to get loss of 154m. TT put that on 1040 line 14 Other gains form 4797. So net was loss of 50m.


 


Now doing it your way as described above comes out with the same basic number, 50m loss. The difference I see is that if I made a profit, the amount would be subject to ordinary or capital gain and form 4797 would take care of that......in lieu of not being taken care of on 1040. Am I right on that?


 


One last question: In the sample that you referred me to on page 7 of pub 4681, it says there are two limits to how much I can exclude. 1) No more than the adjusted basis.....in my case, 299m cost - 29m depreciation = 270m using pub example. Your way above says 299m - 104 forgiven = 195m.


 


 


or 2) What was owed 208m - sale price 115m = 93m. So does that mean my 104m forgiven on the 1099-c is over the 93m limit and I can only exclude 93m? Maybe I am reading too much into this. Sorry.


 


I am trying to look at the big picture of how the IRS handles this. The forgiveness amount is taxable. I get that. The business loss, in my case, is not. I guess what I don't understand is how the numbers bounce from form to form.


 


Thanks so much. I think we're almost there.....Larry


 


 

Expert:  PDtax replied 1 year ago.
If you understand the law, the tax software will eventually follow suit. It's good software.

I would reduce the basis of the property by the debt forgiveness, and then enter the reduced basis on the 4797 to calculate the revised gain/loss. It's not the same net number, the classes of income get different tax treatment.

Reduce the basis of the tax attribute by the 1099-C amount to determine 4797 gain/loss.

Then, your relief is capped by the amount the property is insolvent, What was owed 208m - sale price 115m = 93m.

Then adjust the other income gain directly in Turbotax by reporting the 93K relief on 1040 line 21 as an offset to the total 1099-C. So, on the face of the 1040, you show the 1099-C amount in full, and on the same supporting schedule you reduce it by the amount used to reduce your loss for 4797. Reference Form 982 in the supporting line for the 982 use.

Hope that covers it for you. Thanks from Just Answer/Pearl.
PDtax, CPA firm owner
Category: Tax
Satisfied Customers: 1881
Experience: 32 years tax experience, including four years at a Big 4 firm.
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