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Richard
Richard, Tax Attorney
Category: Tax
Satisfied Customers: 46168
Experience:  29 years of experience as a tax, real estate, and business attorney.
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Complex short sale situation, 4797? 1099c?

Customer Question

I am trying to complete my taxes using TurboTax Premier Online and have a complex short-sale situation.


 



  • I purchased a home in 2007 for 289k

  • I lived in during 2008 I rented the home during 2009 & 2010 with serious passive losses totaling 60k

  • In order to have a short sale accepted I stopped renting it in 2011 The short sale went through in 2012 for 127k with 16k in fees I paid

  • I received 1099c for 143k


 


I am trying to figure out if I have to fill out form 4797 for the sale, but then I also have to enter 1099c. Since I didn't rent it in 2012, it is also saying I can be relieved of the 1099c income. I'm not sure how to classify the property in these different sections.

Submitted: 1 year ago.
Category: Tax
Expert:  Richard replied 1 year ago.
Welcome! My goal is to do my very best to understand your situation and to provide a full and complete answer for you.

Good evening. Under Section 121, if you used this house as your principal residence for an aggregate of 2 years out of the preceding 5 years, it qualifies as your principal residence. You won't report the sale on Form 4797. Rather, you'll report the short sale transaction on Schedule D and Form 8949. Then, with regard to the forgiveness of debt evidence by the Form 1099-C, normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was $2 million or less. The limit is $1 million for a married person filing a separate return. To exclude the 1099-C amount you will complete Form 982 and attach it to your Form 1040. The law has now been extended through the end of December 2013. As clearly outlined by the Mortgage Forgiveness Debt Relief Act, the IRS defines principal residence according to Section 121 of the IRS code, which states that it had to have been the person's principal residence for 2 of the past 5 years before the date of the sale (or foreclosure with regards XXXXX XXXXX Mortgage Debt Relief).



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Customer: replied 1 year ago.

Thank you for the answer... I typed out a whole response and some how it didn't save! GAH! Ok here goes again. but much shorter and too the point this time :)

 

What gives me pause is this:

 

If I list the short sale on 4797 (because I was using Schedule E in previous years and tracking passive losses and depreciation) I have a business loss of 178k. Because I can't qualify to claim the 143k in forgiven debt, I have to claim it as income. When I do this I end up owing a few thousand dollars in taxes.

(further more, TurboTax for some reason won't let you enter a 1099c that you received on a rental property... so I have to list it as personal debt forgiveness to even get it to enter)

 

If I list the short sale on Schedule D as you say, and I list the 1099c as coming from my main home, the debt is forgiven as income, but I end up owing twenty thousand dollars in extra taxes!

 

I can't seem to figure out why that would be. Reading your answer, it sounds like you are saying I should be happy to list it on Schedule D, but my point is that I am actually not! Is there a method for listing it on 4797 and a situation where it may be more advantageous to do so?

Expert:  Richard replied 1 year ago.
Thanks for following up. You are in a bit of a catch-22. It can't be both rental property and your principal residence. If it's your principal residence, you can't take the loss from the sale. But, if you claim it as rental property and take the loss, though you would not be eligible for the exclusion of the debt forgiveness due to the property not being your principal residence, there is also another exclusion you might be able to use that would exclude the forgiveness of debt. That's the insolvency exclusion...if your liabilities exceed your basis immediately before the forgiveness, then you can exclude it on Form 982 as well....giving you the best of both worlds.
Customer: replied 1 year ago.

Thank you for all this. Last question:


 


When I put the 1099c on there and the home is on a schedule D, I am getting a 11k tax bill from the state of Massachusetts taxing the entire forgiven debt amount at 5.25%. Does Mass not recognize the federal exemption for short sale of a primary residence in their state taxes?

Expert:  Richard replied 1 year ago.
You're welcome...it's my pleasure.


Pursuant to the Massachusetts Department of Revenue (http://www.mass.gov/dor/individuals/filing-and-payment-information/guide-to-personal-income-tax/income-excluded/other-items-specifically-excluded.html#Mortgage):


"The Mortgage Forgiveness Debt Relief Act of 2007 (P.L. 110-142) amended I.R.C. §108(a) by adding an exclusion for indebtedness that is discharged before January 1, 2010 and is qualified principal residence indebtedness. The Economic Stabilization Act of 2008 extended this exclusion until January 1, 2013. Massachusetts does not adopt this exclusion or the extension.."


I'm sorry!
Richard, Tax Attorney
Category: Tax
Satisfied Customers: 46168
Experience: 29 years of experience as a tax, real estate, and business attorney.
Richard and 3 other Tax Specialists are ready to help you
Expert:  Richard replied 1 year ago.
Thank you so much for the positive rating! I appreciate having had the opportunity to serve you! If I can be of assistance to you in the future, just look me up and I will be happy to help!

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