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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
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Experience:  Over 20 Years experience
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Hi Randall, need another answer. Sold my property short and

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Hi Randall, need another answer. Sold my property short and Chase forgave about 500k. My total assets at the time were about 400k. Would this forgiveness be tax exempt because of the insolvency clause in the IRS code ?? Jack

Randalltax :

You did not mention if this is a rental property or your main residence. I will assume it is a rental property.

Randalltax :

The insolvency rule allows forgiveness of the debt as income up to the point of insolvency. You must measure your net worth on the day before the forgiveness of debt.

Randalltax :

On the day before, you include the property and its debt in your calculation.

Customer:

yes rental

Randalltax :

So if you had 400K in assets and, including the debt, you owed $500K, then you can exclude up to $100K of the forgivent debt. But if the forgiveness was $150K, you still have $50K of income.

Randalltax :

If the forgiven debt was $50K, then there is no taxable portion.

Customer:

the assets included are our 401k, cars, and furniture.

Randalltax :

Some districts allow protection of the 401K; others don't. The Southern Federal district does not include retirement accounts, but the North does.

Customer:

the mortage was 900k and shortsale was 400k and Chase forgave the 500k left.

Randalltax :

You'll need to add up all your assets and all liabilities the day before

Randalltax :

That way you will determine how much of the 500K is not taxable.

Customer:

oh i see. it would be alot better if assets were not so high

Customer:

total liabilities were about 1 million. Chase forgave about 500k. Assets about 400k

Randalltax :

The insolvency is not measured by the property in question, but by your entire personal financial picture.

Randalltax :

How much were your assets on the day before, including the Fair value of the house?

Randalltax :

You sold the house for 400K, so we know you had to have assets of more than that.

Randalltax :

And how much were all your liabilities, including mortgage on main house, car loans, credit cards...

Customer:

about 300k for house(not 400k), and 325,000 in 401k, all other assets negligible

Customer:

we rent now

Randalltax :

I'm confused: What was the value of the rental house and separately, your personal house (if owned)? How about your cars?

Customer:

value of rent house 300k it is what is sold short for

Customer:

we rent have another rental in Balt under water about 75k

Customer:

cars worth maybe 10k

Customer:

nothing in savings or checking

Randalltax :

And how much is the other rental worth at that time and the amount owed on that property?

Customer:

other rental worth 125k owe 200k

Randalltax :

OK, Jack, so I see that you were upside down (negative net worth) by more than $500K, so it would look like none of the forgiven debt would be taxable.

Randalltax :

So, that should give some relief.

Customer:

are we pretty sure or am I not giving you the info you want ?

Randalltax :

based on the info your provided, it appears you were more than $500K insolvent.

Randalltax :

Unfortunately, I must run now or my wife will leave me :) . If you need further assistance on this question, feel free to leave your questions and I will respond in a few hours. Thanks for you patience.......

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