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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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My client received Form 1099-A with principal of $66,458 and

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My client received Form 1099-A with principal of $66,458 and FMV of $22,000 on one of their rentals, a difference of $44,458. For that property, there is only approximately $41,000 of basis left AFTER 2012 depreciation. I will use Form 982 to reduce the tax attributes, but I think I am limited to the $41,000 and may have income for the difference. Since my client also has about 15 other real property rentals with plenty of basis, do I have income for the difference on the one property they received the 1099-A on (it was definitely an abandonment and not a foreclosure) or am I able to reduce the basis difference on one of the other properties (none collateralized by the 1099-A property)? Also to note, all of the properties were in a chapter 7 bankruptcy finalized in 2013.


LEV :

Hi and welcome to Just Answer!
The form 1099A report the fact of disposition of the property. It doesn't tell anything if the debt is forgiven or not.
If the debt is NOT forgiven - there is no reason to use form 982.
If the debt is forgiven - your client should receive form 1099C - and then - you will use form 982 to exclude forgiven debt from taxable income. If the chapter 7 bankruptcy finalized in 2013 - it is likely that debt would be forgiven in 2013 as part of the bankruptcy procedure - and your client will receive form 1099C in coming January.

LEV :

I think you are eligible to exclude cancelled debt from taxable income and do not need to list it on line 21.
Considering your situation - you do qualify to exclude the canceled debt as "qualified real property business indebtedness" No need to verify insolvency - still you will need the tax attribute reduction - means the basis should be reduced by the amount of debt forgiven.
Use Form 982 - www.irs.gov/pub/irs-pdf/f982.pdf - specifically - for rental property - check the box 1(d) - Discharge of qualified real property business indebtedness , and put the forgiven amount on the line 2 and on line 4 and line 10a. The line 10 is specifically to reduce the basis.
However - the basis will not be reduced below zero. If you use "qualified real property business indebtedness" exclusion - no need to reduce the basis for other properties.

LEV :

If the property is disposed in 2012, but the debt is not forgiven in 2012 - the debt becomes a non secured debt ( as there is no collateral) - and will be excluded on 2013 tax return as "discharge of indebtedness in a title 11 case" - in this case - tax attributes should be reduced.

Customer:

Thanks Lev. To be clear, are you suggesting I don't report anything for 2012 and wait to see if they receive a 1099-C for 2013?

LEV :

Correct - I suggest to verify if the debt was forgiven in 2012 and if yes - there should be form 1099C for 2012.
You may order the tax account transcript to verify form 1099C and may contact the lender for clarification.

LEV :

If the debt was not forgiven in 2012 - that would be only disposition of the property - reported as a sale - and most likely - there would be a loss.

Customer:

Pretty sure there was no 1099-C...just the 1099-A. But I will verify per your suggestion. If the debt was not forgive in 2012, I think I would have a slight gain based on the difference of the principal, FMV and basis of the property. I suppose the gain would be the same as the difference in my exclusion.

Customer:

Oops...hit the enter button to go to next line. Sorry.

Customer:

Final question...if I ended up with income because the exclusion was less than the principal/FMV in any other case, would the income go on Schedule E or line 21?

LEV :

Seems as the disposition is treated as a sale at FMV of $22,000. If the basis is 41,000 left depreciation - I see a loss. That loss will go to line 14 (1040) from form 4797.

Customer:

I'm pretty sure it is ordinary income, but I have heavy losses on Schedule E so it would "disappear" if put there.

Customer:

Oh, I see. I guess I was considering the sale as the $66,000 principal and not the $22,000 FMV.

LEV :

The loss from disposition of rental property is fully used to offset other taxable income - no rental loss limit on disposition.

LEV :

You will only use the amount of principal outstanding as your sale price if that is non recourse debt.
Generally - you need to use FMV as a sale price.

Customer:

Great. It is recourse debt for sure. I think you have given me enough information to go forward. I really appreciate your expertise. First time user and glad I found this site. Have a great evening and thanks again!

LEV :

I am glad to be helpful.
Please be sure to come back if any clarification needed.

Customer:

I certainly will

LEV :

My goal is to provide EXCELLENT service.
If you will later ask additional questions - I might be not immediately available - but surely will address all your concerns.

LEV :

As I know - Indiana is a recourse state - so - your client should get form 1099C at some point. You just need to verify when.

Customer:

Thanks for all your help. One last thing. Is there a "button" to print this conversation or just copy and paste to Word?

Customer:

Got it!

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