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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I had a short sale on a rental property & got a form 1099c. Debt

Resolved Question:

I had a short sale on a rental property & got a form 1099c.
Debt dischaged 152,338
Outstanding bal.241,404
Sales price 89,067
FMV 120,000
adj. basis 220,702(259,933-39,231 acc. depr.)
What do I use as sales price on form 4797 89,067 or 120,000 FMV?
Also where do I report the 152,338 cancelled debt as incom on line 21 form 1040 or schedule E?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

Lev :

Hi and welcome to our site!
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.
No need to report income on 1040 line 21.
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.

Lev :

The sale price in your situation is what the property is sold for $89,067
The FMV is used as a sale price if the property is foreclosed - but since it was actually sold - you have a sale price.
Your adjusted basis should be reduced by the amount of debt forgiven that is excluded from taxable income 220,702 - 152,338 = 68,364
You will use these values to report the sale transaction on form 4797

Lev :

So - you will have a gain $89,067(sale price) MINUS 68,364(adjusted basis) = $20703
and because the gain is less than accumulated depreciation - the full amount will be attributed to depreciation recapture - that will be calculated on form 4797.
If you have any rental losses (including rental losses carried from previous years) - these losses will be fully deducted.

Customer:

I thought there were certain requirements to use the qualified real property business indebtness & that the basis reduction had to be on property owned right after the sale nt on the property sold.

Lev :

If the debt is related to the property - the basis of THAT property is adjusted by the amount excluded.

Lev :

For Qualified Real Property Business Indebtedness - see page 7 in this publication - http://www.irs.gov/pub/irs-pdf/p4681.pdf

Lev :

Qualified property. This is any property you use or hold for use in your trade or business or for the production of income, including rental income.
Thus rental property is a Qualified property for that purposes.

Customer:

Do I have to show the adj. of 152,338 separate on form 4797 or just show 68,364 on column f?

Lev :

You will use 68,364 - and may (while not required) attach a statement how that value was calcualted

Lev :

Please be aware that if you have any selling expenses - these are added to the basis.

Customer:

Thank you very much for your help. I think I got it.

Lev :

You are welcome. Glad to be helpful.

Lev :

Please take a moment to rate my answer - so I would be credited for the work done.
My goal is to provide EXCELLENT service.
If you need any help now or in future - be sure to come back and ask for clarification.

Customer:

I just noticed that on page 7 of pub.4681 there is a note that the exclusion for Qualified Real Property Business Indebtedness does not apply if you were insolvent immediately before the debt cancellation.

Lev :

That is correct.
The sentence you mentioned is related to two different types of exclusion and priority in which they should be applied. However regardless which type of exclusion is claimed - you still need to reduce tax attributes - in your case that is the basis of the property.

Customer:

There is also an exclusion limit of the amount of outstanding principal over the FMV in my case it would be 241,404 less 120,000=121,404

Lev :

I am not clear - are you claiming an insolvency exemption or not?

Customer:

I will if I need to, but the limit that I am referring to is if I claim Qualified Real Property. I just want to do the correct less complicated way.

Lev :

Please provide a reference to instructions about the limit you mentioned.

Customer:

It is on page 7 of pub. 4681 under Qualified Real Property the caption is labeled Exclusion Limit

Lev :

So what is your question?

Lev :

The fair market value is your sale price.

Lev :

Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.
If the property was sold on the open market - and not to the related party and without any considerations - the sale price is considered the FMV.

Customer:

My question is that instead of excluding the 152,338 from income I can only exclude 121,404

Lev :

That is based in the FMV is determined correctly.
If you think that the property was sold for less than FMV - then you are correct.
But I think that you are using not correct amount for FMV.

Customer:

The property was sold for 89,067 but the FMV shown on 1099c is 120,000

Lev :

I think that the FMV shown on 1099c is 120,000 is not correct.
If the sale was approved by the creditor - it must be the best price they could get.
So the sale price indeed is the FMV.
If you have any doubts - you may ask the creditor to correct 1099C or attach a note to your tax return. But I do not think that is needed.

Customer:

Thank you very much.

Lev :

You are welcome.

Customer:

I am trying to do the rating but it is not letting me.

Lev :

Please try again

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 23241
Experience: Taxes, Immigration, Labor Relations
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