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taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 394
Experience:  Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
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Need CPA working on my taxes Need to understand the exception

Resolved Question:

Need CPA working on my taxes Need to understand the exception on 1099c and 1009a in Basic english and real time numbers

Qualified acquisition indebtedness is

1.debt incurred or assumed to acquire, construct, reconstruct, or substantially improve real property that is used in a trade or business and secures the debt, or
2.debt resulting from the refinancing of qualified acquisition indebtedness, to the extent that the amount of such debt does not exceed the amount of debt being refinanced.

What amount of cancelled debt can be excluded from income?

There are a few limitations as to the amount that you can actually exclude from income due to a discharge of real property business indebtedness. First, you cannot exclude more than the excess of the outstanding principal amount of the debt (immediately before the cancellation) over the net Full Market Value (FMV) (as of that time) of the property securing the debt, reduced by the outstanding principal amount of other qualified real property business indebtedness secured by that property (as of that time). The amount that can be excluded is further limited to the aggregate adjusted basis (as of the first day of the next tax year or the date of disposition, whichever is earlier) of depreciable real property you held immediately before the discharge. This does not include any property that was acquired in contemplation of the discharge. Any excess could not be excluded, and would be included in income.

This is confusing for me so I need i broken down with real numbers can you help what would you need from me ? to figure it out both on the short sale and a foreclouse were

Mike
Submitted: 1 year ago.
Category: Tax
Expert:  taxmanrog replied 1 year ago.
Welcome to Just Answers! Thank you for the opportunity to help answer your questions! I will do my best!

I am sorry to see that you are faced with a short sale. In this economy it has become all too common. I have had several clients go through them!

In order to put some real numbers to your situation, I would need the cost of your home, plus the cost of any improvements you made to it (this is your basis). I would also need the selling price of the house at the time of the short sale. I would need the principal amount of the debt that was forgiven, and the original amount of the debt. I assume that you have lived there for two years as your principal residence? Are you married or single? Was all of the debt originally incurred to purchase, reconstruct or improve the property?

In most cases, the bank short sells the house for the FMV, and forgives the balance of the loan. So if you have a home that you owed $100k on, and it went through a short sale for $75k, the bank would issue you a 1099-C in the amount of $25k.

Once you give me your numbers I can calculate your situation.

Thanks! I look forward to your reply!
Customer: replied 1 year ago.

Hi I am considered a realestate Professional and passed all IRS rules in 2008 and 2009 when I was audited and have several homes and condo lets do the first one short sale it was purchase for 95k and sold for 35k it was rented for a few years i did get the 1099c


 


This was not my personal home but rental income for me I am Married


it was a purchase


 


The Foreclosure was built new in 2008 for about 360k i had a 339k mortgage it was also Income rental and it was new con truction that we built. the house was sold for 269k and the fmv was 289k wich was so very low I have an appraisal for the real estate company on paper for 373 a month after the sale for 373k it was a 2450 sg foot high end home for 140 per sguare foot plus 30k for the land that is cost basis not giveway price


 


This is for 2011 tax return I was was a victim of Identify theft that is what this return is now just being filled I was on extension for Oct 15 20012


On form 982 I want to make sure this is down correctly for line item 4


 


what about the foreclosure do we need to fill form for that


 


 

Expert:  taxmanrog replied 1 year ago.
Thanks for your reply.

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. It does not apply to rental property.

With rental property, a foreclosure is considered a sale in the amount of the mortgage balance immediately prior to the sale. So if the bank foreclosed on the house and you owed $339k on it at the time of foreclosure, it is considered a sale for $339k. If the cost was $360k (I am assuming that included the $30k land value) you would have taken three years' depreciation, or about $12k of depreciation. So you would have a basis in the property of $348k ($360k cost -$12k depreciation). So you would have a deductible loss on the property in the amount of $9k ($339k sales price - $348k basis). The Form 982 does not come into play at all. This sale is reported on Form 4797, which then flows through to the Schedule D.

I hope this answers your question! IF you have any more, or would like help with the Form 4797, please let me know.

If you have found my answer helpful, please rate me highly! I would appreciate it!

Have a great weekend!
Customer: replied 1 year ago.

Hi Ok what about the short sale should I be using the execption for line 4


 


 


do i owe anyhing in taxes are do we quailfy for exception on both

Expert:  taxmanrog replied 1 year ago.
Are you talking about the Line 4, Exclusion from Income, on the Form 982? This form does not apply to a short sale of rental property. It is not used at all. If someone told you that you needed that form, they are wrong, as it does not apply to this situation.

You would fill out the sales information on the Form 4797, Part II, Line 10 for the sale of the property. The columns are pretty clear as to what is needed. By filling these out correctly, you would arrive at the $9k loss (roughly) that I indicated in my last reply. You would report the resulting loss and carry it down to line 18b of the Form 4797. This loss amount then carries over to your Form 1040, and is reported on Line 14. It is allowed to offset any other ordinary income (wages, interest, pensions, etc.) that you may have.

This is actually better treatment, as your loss is deductible. If it were your personal residence, the forgiven debt could be excluded from income and you would use Form 982. But the loss on the sale would be non-deductible as it is the sale of your home, and losses on home sales are considered personal and therefore not deductible.

I hope this clarifies things! If you have found my answer helpful, please rate me highly, I would appreciate that!

Again, thanks and have a great weekend!
Customer: replied 1 year ago.

Still confused we have two properties involded here it is the condo rental that was short saled and the house that you are saying for form 4797 on the foreclosue


 


 


can we talk about the short sale what do with this is this qualify for the exception for business use purchase build etc etc

Customer: replied 1 year ago.

i understand what to do with the forclosure how do I address the shortsale


 


is was a 1099 c for 56k the older account i am taking to says it will fall under the exception


 


is this correct how do we not pay taxes on this 56k

Expert:  taxmanrog replied 1 year ago.

I am so sorry! I thought we were still talking about your rental condo!

I am going to assume that you have lived in your home for more than two years as your principal residence.

For your personal home, yes, Form 982 is used. The amount of debt canceled does go on Line 4 of the Form 982. It is also reported on Line 2 of this Form. For Line 3, the box should be checked "NO"..

The amount from From 982 reduces the basis in your home. You have to report the sale of the home on Form 8949.

You report the short sale proceeds on Form 8949, Column E. The basis for the Form 8949 is your cost (plus improvements), less the debt forgiven that you put on Form 982. This amount is reported in Column F if the Form 8949.

If this results in a loss, you report put a POSITIVE amount in Column G of the Form 8949. This will zero out any loss that you have on the sale. If it is a gain, you put a NEGATIVE amount in Column G of the Form 8949 to zero out any gain (up to $250k for single, or $500k for married filing jointly). For both cases, in Column B of the Form 8949, you put a "H" as the code. This indicates that it is for the sale of your principal residence, which tells the IRS that there is no gain or loss on the sale, up to the Exclusion amounts (as I said, $250k for single, $500k for married).

I hope that finally this is clear! I apologize for the confusion. I knew we were handling these one at a time, and thought we were still on the rental unit.

If you have any further questions, please let me know. If this has helped, please rate me highly! I would appreciate it!

Again, thanks and have a great weekend!

Customer: replied 1 year ago.

No this are business investment rentals

 

1) the house was built new and we rented in out it then Foreclosured you told me how to handle this correct ???

 

2) Then i told you in very beginning there was a short sale on a seperate rental property

 

we are dealing with 2 separate issuses

 

Now what happens on the short sale and the 1099 c that we have for 56k

My accounted says he will use form 982 and I am exemptions for business purchase etc I am a realestate professional

 

again non of this is my personal home

 

Canceled Debt that Qualifies for EXCLUSION from Gross Income:

 

  1. Debt canceled in a Title 11 bankruptcy case
  2. Debt canceled during insolvency
  3. Cancellation of qualified farm indebtedness
  4. Cancellation of qualified real property business indebtedness
  5. Cancellation of qualified principal residence indebtedness

 

do we qualify for number 4 on the condo short sale ?

Expert:  taxmanrog replied 1 year ago.
Yes, the foreclosure was as I explained in the first set of exchanges. The short sale for a personal residence was my last answer.

For the short sales of rental property, you can elect to exclude canceled “qualified real property indebtedness” from income.

“Qualified real property indebtedness” is, generally, debt that meets all of the following conditions: (i) it was incurred or assumed in connection with real property used in a trade or business; (ii) it is secured by real property; (iii) it was incurred or assumed after 1992, if the debt is either qualified acquisition indebtedness, defined below, or debt incurred to refinance real property business debt incurred or assumed before 1993, but only to the extent that the amount of such debt does not exceed the amount of debt being refinanced; and (iv) you elect to apply these rules by filing Form 982 with your federal income tax return.

 

“Qualified acquisition indebtedness” is either (i) debt incurred or assumed to acquire, construct reconstruct, or substantially improve real property that is used in a trade or business and secures the debt, or (ii) debt resulting from the refinancing of qualified acquisition indebtedness, to the extent that the amount of the debt does not exceed the amount of the debt being refinanced.

 

So, assuming that the debt was qualified acquisition indebtedness, and you are a real estate professional, so the debt is qualified real property indebtedness. You can exclude this from income by reducing the basis of the property by the amount of debt forgiven. You also report this amount on Line 4 of the Form 982.

 

If the property is subsequently sold (in your case through a short sale), you still report the sale of the property on Form 4797, using the short sale amount as the proceeds and the basis reduced by the amount of debt forgiven (the amount on the Form 982). The short sale then results in a gain or loss.

 

I hope this answers your issue! If not please feel free to ask away!

Customer: replied 1 year ago.

Ok you have been so nice and patient so can I take a huge loss on the short sale bought for 95k short sale for 39k


 


can i actually take the huge loss?

Expert:  taxmanrog replied 1 year ago.
You have to adjust the cost basis for the amount of debt that is canceled. So if you bought it for $95k, and they forgave $20K and you took $10k of depreciation (which reduces your basis), and you sold it for $39k, you would have a loss of $26k ($39k selling price, less basis ($95 - $10k depreciation - $20k debt forgiven)).

So yes, if this results in a loss, it is ordinary and allowed in full! It is not a capital loss!

If you have any more questions, please let me know! If this has helped you, please rate me highly! I would appreciate it!

Thanks again! It has been my pleasure to answer this question! Quite a mental workout!
Customer: replied 1 year ago.

They for gave 56k that is what on the 1099 so how do numbers look now


 


you have been a pleasure to work with !


 


Mike


 


I will let people know that you are a good source


 


be happy to send nice testimonal

Expert:  taxmanrog replied 1 year ago.
Ok. You sold for $39k. You bought for $95k, they forgave $56k. That reduces your basis from $95k to $39k. You have no gain or loss, unless you have taken depreciation, which also reduces your basis. If $95k was the basis net of depreciation, you have no gain or loss. It is not often that it happens like that!

Mike, Thanks for the testimonial! I would appreciate it! I work hard to try to help! My wife has Stage 4 kidney cancer, and goes through chemo every night, so while she is gone, I try to exercise my mind by helping people on here! It also relieves my stress! Also, I enjoy teaching, and this site allows me to answer more questions than I usually get in the classroom!

So thank you for the chance to answer these questions!
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 394
Experience: Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
taxmanrog and other Tax Specialists are ready to help you
Customer: replied 1 year ago.

thanks so much God Bless you and your wife


 


were to we give you a nice testimonal

Expert:  taxmanrog replied 1 year ago.
Thanks for the excellent rating! I will see where you can put a testimonial and leave it as a follow-up for you! Thanks also for the prayers for my wife! Those are truly appreciated!
Customer: replied 1 year ago.

opps I forgot there should be no cancelation of dept on the foreclousure is that correct


 


I will just take the loss on 4797 this will help my tax burden on my overall taxes owed


 


Mike

Expert:  taxmanrog replied 1 year ago.
On the foreclosure you may receive a Form 1099 for the cancellation of debt, but it is not income. The foreclosure is considered a sale for the amount of the mortgage debt forgiven.

Yes, it is reported on Form 4797. The loss can offset ordinary income and reduced your total tax liability.

If you have any more questions, please let me know! If this has helped, please rate me highly! I would appreciate it!

Thanks! Have a great day!
Customer: replied 1 year ago.

thanks you help yesterday


 


 

Expert:  taxmanrog replied 1 year ago.
IT was my pleasure helping!

If you found my answer helpful, please remember to rate me positively! I would appreciate it!

Again, thanks!

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