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Phillip B, EA
Phillip B, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 631
Experience:  Practicing since 2004. Expert in 1040, small business, represent vs. IRS, & int'l tax mattters.
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I have a client who has been issued a 1099 Forgiveness of Debt

Resolved Question:

I have a client who has been issued a 1099 Forgiveness of Debt for $ 224100 for his rental property. this property was bought as principal residence in 2002 and converted to rental property in 2009

The client bought the property in 2002 for $ 390,000 and had improvements done for $ 44318 and depreciation of $ 38542 thus has a basis of $ 395576

The original amount of loan that client borrowed when the property was bought was $ 350,000 and subsequently refinanced for $ 600,000 when the market price were high.

The client sold the property as a short sale in 2012 for $ 390,000

The outstanding loan balance was $ 583562.34 that was paid off for $ 359462.34 resulting in a debt forgiveness of $ 224,100

My question is what will be his COD ( cancellation of debt income ) income reportable as taxable in 2012 and how much gain or loss should be reported on short sale ?

Mahesh @XXXXX@XXXXXX.XXX
Submitted: 10 months ago.
Category: Tax
Expert:  Phillip B, EA replied 10 months ago.
Thanks for choosing JustAnswer.com! I will do my best to provide you with a clear and concise answer based on the information you have provided me.

The COD income is 224,100 dollars. However, the reportable amount may be less if the client was insolvent immediately before the short sale. Although you sound like someone who understands finance principles and insolvency, I will review the definition because these answers are searchable and viewable by others. Insolvency means the client's total liability balance is greater than the total fair market value of the all the client's cash, stocks and bonds, real estate, retirement accounts, and all other assets. The difference that liabilities exceed asset values is the amount that can be excluded from the taxable canceled debt income.

The gain or loss would be the difference between the sales price on the short sale and the client's adjusted basis. In your client's case that would be a 5,576 dollar loss.

If there are other questions, please reply to this answer so that I may assist you further. If this answers your question, please rate my performance between OK and Excellent so that I may receive credit for my work.

Thanks for your business.
Phillip B, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 631
Experience: Practicing since 2004. Expert in 1040, small business, represent vs. IRS, & int'l tax mattters.
Phillip B, EA and other Tax Specialists are ready to help you
Customer: replied 10 months ago.

Thank you


 


One clarification


 


The client is solvent Does it mean the entire $ 224100 is his income in 2012?


 


Does he any QRPBI ( qualified Real property business indebtedness ?

Expert:  Phillip B, EA replied 10 months ago.
Yes, the full amount is income.

No. Qualified Real Property Indebtedness only includes debt assumed before 1993 or acquisition indebtedness.

Let me know if there is anything else that I can do.

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