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I am trying to help a friend out. In 2010, she short saled a rental property, in which she received a 1099-C from the lenders in excess of $232,309.09. She did not receive a 1099-S from the escrow company, which needs to be reported as well on the tax return, and that amount was $130,000. So, there are two separate transactions: 1099-C and Form 4797 in disposition of the property. Where confusion lies is, since she missed her election on Form 982 for business indebtedness exclusion, is how to calculate the basis for Form 4797. The IRS says take the purchase price ($351,883) - depreciation recapture- cancellation of debt (COD). She is not entirely insolvent ($77,397.38) [Cancellation of debt - insolvency amount]. Is that the correct way to calculate adjusted basis? Furthermore, for the 1099C amount, Form 982, report the difference ($77,3797.38) as rental income on Schedule E, since she is not entirely insolvent and missed her opportunity for exclusion of business indebtedness. Is this right? Thanks.
do you know if this is a recourse loan?
Box 5 is checked.
Thanks, XXXXX XXXXX by the way. I have gotten so many different responses.
Ok thank you
I'm a fellow tax practitioner, by the way.
I am stumped on this.
Please give me a few minutes to get my ducks in a row
No problem Anne, thank you. I'm Steve.
I would be willing to pay more than $30 if you can assist on this one lol
The IRS has given me ten different answers.
We'll see how well I do then..........but no pressure, right? lol
No pressure. Just need a new set of eyes on it.
Complex tax law dept couldn't even answer.
The basis of the home is the purchase price, plus any improvements made during the time your friend owned the home, less the cost of sale (sales commission, transfer tax, etc) less depreciation
Yep, we're on the same page so far.
There is a very simple worksheet to figure this........I have it at my office..........I ALMOST have it memorized, but I'd rather find it for you
The cancellation of debt is what is throwing me off and when the IRS said to include it.
may take a few minutes though
No, Anne, I know that part. I have no problem figuring that out for her.
ok.........this is how this works
IRS said to determine insolvency and include that or reduce the basis on Form 4797..that's what confused me.
Amount realized (the $ amount of the canceled debt, of FMV, whichever is LESS)
subtract the basis from the amount realized
this will give you the loss on the foreclosure that goes to form 4797
The COD and to include that in the adjusted basis seems very wrong.
I'm working on line 21 entry
To include COD in the adjusted basis seems very wrong.
Please tell me what you are referring to as "COD"
oh.......Cancelleation of Debt..............sorry
This first step is figuring the loss on the foreclosure/cancellation of debt
anne, is there any way to enhance the chat log? I can barely read it
We can change the format..........give me a minute to do that
Yes. I have the purchase price, depreciation amount, cancellation of debt amount, and the price that it was sold, if that helps. I just don't think the COD needs to be included in the adjusted basis.
I agree Anne, but line 21 or Schedule E, since it was a rental?We're on the same page so far.
I agree Anne, but line 21 or Schedule E, since it was a rental?We're on the same page so far. Remember, this is for a prior year, so no election of business indebtness is applicable.
Thanks Anne. I just need guidance on the adjusted basis. The cancellation of debt is really throwing it off and is that part of the equation. You got all the "numbers," right?
Part 1, Line 1: $352,458.88
Part 1, Line 2: $130,000.00
Part 1, Line 3: $222,458.88 (different from 1099C given)
Part 2, Line 4: $130,000.00
Part 2, Line 5: $0
Part 2, Line 6: $130,000.00
Part 2, Line 7: ? (recapture depreciation, not sure what else to include here. This is where the IRS said we had to include COD. I don't agree.)
$130,000 is what she sold it for.
1099C is $232,309.09
Hi Anne:Two separate 1099C's:
Box 1: 4/26/10
Box 2: $68,189.35
Box 2 (on other 1099C): $164,119.74
Box 5: Checked on both.
Box 7: FMV $0
Original purchase price: $351883
1st and 2nd mortgage.
I owe you a drink, a meal, and your favorite gift, Anne!
Sure. I feel bad, because this is worth more than $35. Is there any other way we can converse about this?
You tell me when is good for you.
The chat room format is just so small to read.
I'm in California. It's 3 hours earlier. Later in the week is better for me.
Thanks! I am just confused why the IRS told me to include the Cancellation of Debt income in the Form 4797, but I will fill it out.
How do I address the question to just you?
THANK YOU SO MUCH FOR YOUR EFFORTS!
Hi Anne!No problem. In the event that this chain of event causes a Net Operating Loss, and since 2009 cannot be amended (statute passed), the only way to capture it is to carry it forward to 2010 and 2011 and beyond...is that your feeling, as well? Thanks!
I apologize...........I thought she hadn't filed 2010..........but apparently she filed it without the 1099C's is that correct?
Even so, the waiver to forego the carryback was supposed to be filed with the 2010 return..........
If your friend didn't file the waiver, and the IRS caught the error with the 1099C's, then you might be able to effectively argue that the time was extended due to the IRS changes which opened up that year.
I can't speak to why the IRS would tell you to just carry the NOL forward.........they wrote the book.......literally..........
Do I believe that she would be better off carrying it forward? Absolutely. Would I do it without carrying it back first? No.........as an EA I can't do that.
If you call the IRS and they tell you to carry it forward.......be sure to get the person's name & #.
A follow up to our discussion... the IRS confirmed a timely filed 2010 tax return would result in a NOL and carry back two years.
Do you usually use a Form 1045 or do you think I can use just the 1040X reflecting the NOL carryover losses?This is getting too deep!
Grrr!Once again, the IRS tells me wrong information. They said I can either do the Form 1045 or the Form 1040X. I'm amending 2008 and 2009 tax returns to reflect the NOL.
LOL, I am married, just trying to make sure due diligence is done on the tax return.
We cannot use Form 1045. It should've been used by 2012 in this case, and we missed the opportunity. Concur?
Very creative....does this mean that you own your own business? (and don't worry....I'm not planning on moving to CA....I'm pretty happy where I am........well, except for tornadoes........and blizzards...which I actually like......there's a certain beauty to it.....except I would like to like them from HOME and not work.......and the high unemployment........and rising crime rate, and...................maybe having big brother watching out wouldn't be so bad after all...........lol)
I'll talk to you tomorrow.........let you know where we stand
Can you ask them why, when I called customer service, they gave me a completely different email address? It's worse than the IRS that the answers are not the same.
Those kinda things bug me.
Sorry to hear about all your family issues.
I have sent XXXXX@XXXXXX.XXX the attachments. Please let me know when you get them.
Hi Anne:Well, I sent it four times to them while I was on the phone with them. Let me know if you received it.
Ok, give this a try. You might need my email address, XXXXX@XXXXXX.XXX and the password XXXXX XXXXX You also might just want to try the same email address that I am using for JustAnswer. I just changed it.
I also got an email from support and they told me to email them the documents, which I did--hopefully you got it both ways.
Hi SteveI'm starting to sink my teeth into this project now...........First, on Form 4797, HER sales price is the $ amount "forgiven".........($232,309) not the $`130,000 the bank sold it for......by the time the bank sold it, she no longer owned it, so she couldn't have sold it for any price. Please see below:
If I had a foreclosure on a rental property, how do I report this?
The sales price will be the amount of the entire outstanding debt in box 2. Figure your gain or loss by subtracting your adjusted basis in the property from the sales price.
Once you correct her selling price, you will still have an NOL, but it won't be NEARLY as much as you had before:
Although I am going to use the figure you have for the cost basis, I going to assume that you added the $ of the improvements she made to the home during the time she owned it, and that your subtracted the depreciation taken over the years.
So here's what your 4797 should look like:
Gross sales price ($232,309) less her adjusted cost basis ($351,883) will give you a loss of $119,574)
This will, of course, change all of your figures on your worksheets.........(I'm hoping that they will update automatically once you change the 4797)
In the meantime, I've got a call out to the mods to find out why we can't see uploads from each other on media file
Anne, I disagree with you. She short sale'd the rental hence why it led to the bank agreeing and cancelled the debt. She did not get a 1099-s, but I do have the final HUD reflecting the short sale. I also talked to the realtor and confirmed the transaction.
What started this whole thing is that the previous tax preparer completely claimed insolvency on her 1099-C that she received in 2010; however, the transaction of the short sale never was reported.
When I got involved, a short sale was confirmed by the title company as well as realtor, but she never got a 1099-S. Furthermore, she isn't completely insolvent.
I'm not sure what you are seeing in your state, but here, I'm seeing foreclosures/short sales happen (3 years ago) and now clients are receiving the 1099-C's three years later...it's like after the lender decided to wash their hands from it, they are stinging the client with the 1099-C.
So, in a nutshell, three separate transactions: 1) Proper disposition of the asset, 2) address correctly the cancellation of debt and not be completely insolvent, and 3) address NOL.
No problem. It would have been treated as a 1099-a, which is treated like a sale. Form 4797 would have been reported, where FMV would have been the sales price and her original basis would have been the cost basis. From my experience, when abandoned, there is no 1099 C usually.The 1099C would not be applicable then; although, some practitioners and I disagree and some actually prepare the Form 982 and cancellation to, because they don't believe the client did not get the 1099c.Anne, what is the purpose of a short sale then? The seller still has to sign and acknowledge they agree to attempt to sell it at, 130k in this case. Two separate transactions as mentioned.Thanks for your help !
Anne, I saw this on another answer on the forum. It goes more into the 1099C as a separate transaction, which we know and will do.
What is your adjusted cost basis in the rental property? Adjusted cost basis is the original cost add improvements less depreciation allowed or allowable.
When you short sale, you will sell it at a below cost price(in most cases). Hence, you will have loss on sale of the property.
I will upload you the Final HUD when I get to the office, but everyone is interpreting this cost basis differently. I can see validity in what you are saying and there are some that are agreeing with you, but then there are some that are saying what I'm saying---very confusing!
I just called the IRS re our "discussion" about the sales price. As I mentioned, the settlement statement shows that the sales price was $130,000 and my friend's realtor was in negotiation with the bank for a buyer to buy it at $130k, which was the value of the property at the time.
Thus, our sales price of $130k is the correct amount to report on the Form 4797. I have to recapture depreciation and add sales commission into it, but the sales price on Form 4797 is still $130k. It explains why the cancellation of debt of 1099-C was $232,309.09, because without the sale, the lender wouldn't have cancelled the debt.
Hope that makes sense. The IRS said "Who told you that the sales price was the 1099-C amount? That is wrong." Various websites have different answers...I cannot blame you. This is tough stuff!
So, I will adjust the numbers to include depreciation and sales price and re-send you (probably via email) the NOL stuff. But, for now, you should use depreciation in the amount of $36,726, sales price is $130,000, sales commission $6,500, and sales price of $351,883. So, the adjusted basis should be roughly $308,657. You still have not answered me if we should amend the depreciation to accurately report it, since $340,000 (cost basis) does not seem right. We cannot amend 2008 and 2009 to change that for a refund, but I would think, I would just change it to keep them happy. I usually use a 80-20% rule, so that means $281,506.40 is the building portion, but please advise.
My email address (the one used to sign up for JustAnswer) is the email address on Mediafire and the password XXXXX XXXXX Can you see if you can get in?Thanks for your help, as always! I'm glad we are making some headway...this is driving me nuts of the inconsitent stories that the IRS is telling me. Like I said, I have four more after this one lol.
If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. See Filing an Amended Return , next. If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. See Changing Your Accounting Method , later.
You're not going to change your accounting method since the house has aready changed owners, and you can't file an amended return, because its past the time limit for an open year: this is also from pub 946
If an amended return is allowed, you must file it by the later of the following.
3 years from the date you filed your original return for the year in which you did not deduct the correct amount. A return filed before an unextended due date is considered filed on that due date.
2 years from the time you paid your tax for that year.
Ok........we're on the same page again............if a HUD statement was filed (and obviously it was) then you're right, you do have to use that for the 4797.Let me work for a while with the figures you have given me, and I'll check back and let you know what I think, ok?
I used to use the 80/20 split too, but land in MI has risen a little............that may not be true in CA though, so I'll use your %
When you say rough out the 2010 1040, what do you mean? I can always scan it to you and send it to you like the last time.
Please clarify and I'd be happy to do.
Yes, the HUD statement says the selling price is $130,000.
Ok, happy surgery! I didn't include the HUD statement in the Mediafire, but I will now. I did include the first two pages of the 1040.
Anne, no problem! Yes, I want it done right--it irritates me that it was not done right the first time, but this is complicated stuff. Hope you got Lori's email.
Did you have the surgery?
I don't know if I got the returns through media fire.........I'm at the office, and while this website is not blocked, that one is.
However, I do have some questions for you.
1-Why does Form 4797 show $221883 loss, but 1040 line14 only shows $185307?
2-What is the breakdown of the Schedule A deductions.
3-Where does the loss on Schedule D come from? Mutual funds, etc?
Since I'm at the office, if you could just list what the Schedule A break down was by number..........not try to send me the form, and just answer the other questions, that would be great!
Also, where did you get the $152130 in non business income. According to the 1040 you sent me for 2010, she had $2 in interest, and $1184 in non taxable interest income. I'm a little confused by your numbers, and at this point, instead of trying to get the forms....which we both know has been a nightmare, can we just talk it out..........Meaning can you give me the line #'s and the $ amounts on the Schedule A, and do the same thing with Schedule D (and also include what the loss was from, whether it was personal or business), and the same with the non business income?
I just edited my answer, asking for some more information.....so I'm hoping you see the edited portion.
I hope you meant that YOU would send yourself an email reminder. This is the only way I can contact you.
If you filed your original return on time but did not file the statement with it, you can make this choice on an amended return filed within 6 months of the due date of the return (excluding extensions). Attach a statement to your amended return, and write “Filed pursuant to section(NNN) NNN-NNNN2” at the top of the statement.
Once you choose to waive the carryback period, it generally is irrevocable. If you choose to waive the carryback period for more than one NOL, you must make a separate choice and attach a separate statement for each NOL year.
Note: the time frame for the tax payer to make this choice is by the due date of the return, plus extensions.
Does this help?
Certain Deductions are not allowed when calculating an NOL:
Nonbusiness net short-term capital loss $1000
(standard deduction, $5950)minus
nonbusiness income (interest, $425)
Deduction for personal exemption $3900
Total Adjustments to the loss $10,325
Another way to think of these is "add backs".........
After doing enough 1045A's, I just remember that the NOL must AT LEAST be more than the personal exemption.......
Anne, did you get my last reply?
Yes, I knew you would reply, just making sure, because I saw your other posts.
Ok, in regards XXXXX XXXXX E and reporting it on there. So, does that mean we report the entire income, take out the insolvent amount, and still put on Form 982 the amount we are excluding?
The NOL is larger than the exemption amount, according to my calculations, so does that mean we still can carry it back? I am getting different answers on the carryback...some IRS people tell me that if you timely filed the return (which in this case it is), you have to carry it back two years. Others are saying no. Then, some are saying if you did not file timely, you cannot carry it back, because you did not do it within the time frame specified. This is MOST important, and I'm gettng different answers, because I have others that I'm going to begin working on that have timely filed, their NOL is large, and I need to know what is what.
How much does my $400 extend me to other cases? :)
Ok.....I hate all of these inconsistencies also. So I went on a quest to find a ruling that had some meat to it.You may carry the NOL forward for the guy who didn't file his 2009 return since you have it in writing.........but DON'T use that as a blueprint. Here is IRS's section/law re: NOL carryovers (which will mean the guy who gave you the ok to carry it forward for the person who didn't file)
A section 172(b)(3) election to waive all of the carryback periods with respect to an NOL “must be unequivocal and unambiguous. ” Powers v. Commissioner , 43 F.3d 172, 176 (5 th Cir. 1995). In the absence of a line item or check off block on a tax form to indicate waiver of the carryback period, this intent is communicated by an express and unambiguous written statement from the taxpayer indicating that the taxpayer is foregoing the carryback period. A taxpayer’s method of reporting an NOL on the taxpayer’s tax returns does not constitute a binding election with regard to that NOL. In Garland v. Commissioner , T.C.Memo 1993-190, the taxpayers noted NOL carryovers on their Schedule C forms for various taxable years but did not file any timely statements electing to fore go the carryback period with regard to such NOLs. Under these circumstances, no valid election to fore go the carryback periods was made.
I've looked at a lot of web sites, but this one gives the BEST description I could find, and came from http://www.legalbitstream.com/irs_materials.asp?pl=i9\
If that's not enough, let me know.......but that worked for my money. (I could find lots of examples, directives, etc in IRS pubs, etc, but I wanted the actual code section that had some meat to it)
As for the lady with the COD that goes to Sch E, you're right........no entry on line 21 for her........As for whether or not you want to mention "Less amount insolvent...see attached 982", on the Sch E, that's sort of a personal decision. I've talked to pros here, and they're running a LITTLE less than 50/50 (with no mention of the insolvency on Sch E with a small lead ...I personally wouldn't do it, but some of the preparers I respect very much would. So that one is your call, its your return)
Line 21 is for personal COD....not business......(my mistake........sorry)
As for the NOL being bigger than the exemption.....that is always my first landmark (just for me....other people use other reminders) the next thing I look at is whether they itemized or not...if they didn't, then I see if the NOL is bigger than the exemption + the standard deduction.
If they itemized.........then I generally pull out the worksheets........
Yes, I'm enjoying the weekend..Thanks for asking.....we're having a cook out at our home tomorrow, and we celebrate my youngest grandson's 8tth birthday on Monday........what are your plans?
As for payments between you and me.........you've always been fair with me..........and I try to give you everything you ask for........alot of what you ask for I do for my fellow preparers for free all the time........so for now, if you throw me $15 every so often, (which was my original payment for your question....but in bonus form, I get a tad extra) my creditors may actually send you a Christmas Card.....
I'm certainly not looking for payment for every single follow up......and JA states you can ask as many follow up questions as you want for free...........so we're sort of between the 2 extremes.
If that doesn't work for you, let me know....I think we both know that we work together pretty well. ..
Ok, so in English, you're telling me that if one does not opt to forego the carryback, then they cannot carry it back, especially since it wasn't timely filed? Did I read that correctly?
If that is the case, that seems unfair, because the return was filed on time and had it been done correctly, I'm sure something would've discussed regarding the NOL.
Weekend...not much, wife is working, I'm cleaning---getting carpets cleaned next week, so have to clean house a bit and trying to work, as well, and catch up. However, a friend is having a BBQ tomorrow, so we'll be going to that.
Yes, I'm ok with that arrangement.
Yes, I misread it for sure! Thank you. That's what happens when you are reading it on the "road," as it were.
So, are you going to help me figure out what the NOL is for 2010 for the lady, in light of the sales commission and it making the NOL larger than the exemption. It's probably pretty close, if we add the exemption plus standard deduction, so we may not have to do a carryback. I'm just trying to get a road map, because the next one definitely will be more than the exemption plus standard deduction, and plus I don't want to keep bugging you.
No problem, Anne. Hi, by the way!
Here's what I have, with adding the sales commission in the cost basis. Her NOL is now $8,252.
Does that mean we have to reduce that by the personal exemption amount? If that is the case, then the NOL is $4,602 (8,252-3650).
That's where my confusion lies...how does one determine if you are able to carry it back or not. The other one I'm working on, the NOL is a lot larger, so how do you determine if you can carry it back? I know what you are telling me, but technically, I'm not comprehending it, and I'm trying.
Hope you had a good weekend!
Nah, I'll always pick your brain on stuff, because it's always good to get another opinion, especially after the complex tax law department gave me such different answers.
Thankfully, Lacerte has calculated all the things you cannot apply and I'm getting saavy about what can and what cannot apply.
So, regarding my lady friend, can I indulge you to help me and determine if we MUST carry it back? If so, then I will have to amend 2009 and have fun with that! :)
When you say creditors favorite JA? What do you mean? Just curious.
It means I finally have some money to pay my bills.(creditors)........they're getting pretty tired of hearing that "tax season is coming"..........in fact, one of them actually suggested that I get a REAL job...because I have REAL bills.......(I never thought of tax prep as a pretend job) ..In response to your question re: how far do you have to carry the NOL back......the correct answer is 2 years, and then, if there's any left over, you can carry it forward for 20 years.......without that waiver attached to the 2010 1040 stating that she wanted to waive the carryback option, then you MUST carry it back to the 2 preceding year's tax returnAnne
I am about to send Lori an email with two attachments. One is the amended returns for 2008 and 2009 along with the NOL worksheets. The other attachment is the Form 1045 alone.
I carried back the NOL back to 2008, and of the $8,252, $6,157 was absorbed in 2008 and $2,095 in 2009. Nothing was left over for 2010. It resulted in no change in 2008, because her taxable income was already zero, and in 2009, it resulted in a refund of $525. So, the first attachment shows all that.
The second attachment is my attempt at the Form 1045. You will see question marks in some areas of it, because I'm not clear what to put there. Please double check everything for accuracy, and of course, if anything is wrongfully inputted in, please let me know.
Again, I just need a road map on this and this NOL isn't so large, where I can grasp things and pick up what you are trying to do.
I will pay you $100 upon completion of your assistance with this....
Thanks! PS: How's the weather? It's overcast here today and looks like it might rain.
No problem, Anne! Have a great weekend!
Fed1040 line 21 has $67222, and you statement 2 shows :COD $77397NOL carryover $10175 ______ $67222
(I have edited this response several times).
The attachments you should have recieved (in order) are the amended 2008, 2009 returns, showing the entire NOL caryback in 2008, and absobring only some of it, and then the rest in 2009. I included the worksheets as well.
The second attachment is the Form 1045 and my attempt and my question marks on what to put in a certain box.
We know that is not right.... How do we show the NOL for 2010 then? The worksheets are just worksheets. It does not show on the 1040 I don't think.... I am trying to understand how we report it accurately on 2010 what we need and then we carry it back to 2008 and 2009. The program automatically may show on 2010 on line 21 COD the 77397. The worksheets are not shown usually...
I had to come back to the office...for something else. You are looking at an old form, I think, because on line 21 I have 77,397 and no mention of NOL.
I just forwarded Lori my 2010 amended files that I think are important for you to see...as I mentioned, there is no mention of the NOL that you spoke of in 2010 on line 21, just the cancellation of debt.
At the end of all this, I need help on what to send to the IRS since we are amending 2008, 2009, and 2010. Do I send in the 1040X, 1045, what do I send, because the time has passed for a timely filed election to carryback, so my understanding is the 1040X and make sure to notate it is for a carryback loss. Please let me know.
how far away is it? Can you tap into both your voice messages and faxes from home?
No worries, Anne. I respect that. I was referring to the fact that I was at the office and wanted to send you some other information that might be helpful that you can assist me on this case. I don't think I included everything....please let me know. We both have worked on this one too long, and sometimes I don't even know what I send lol