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Angie
Angie, Tax Preparer
Category: Tax
Satisfied Customers: 225
Experience:  Bookkeeping, Profit and Loss, Balance SheetsAll types of US Taxes, Tennessee taxes, Personal, business, payroll, sales tax etc.
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I have a residential rental property that was included in my

Customer Question

I have a residential rental property that was included in my Chapter 7 Bankruptcy filing....... bankruptcy now finalized. This property was foreclosed on in 2014, and I received a Form 1099-C. The 1099-C shows the following. Box 2 - $81,142 Box 5 - Personally
liable for debt Box 6 - Code D Box 7 - $30,000 My tax basis on this property is zero. I understand that I wont pay tax on the amount of debt discharged of $81,142, due to my Chapter 7 bankruptcy. Will I still pay capital gains tax on the Fair Market Value
of $30,000 (-0 basis)?
Submitted: 1 year ago.
Category: Tax
Expert:  Angie replied 1 year ago.

No, you will not....

When you report the 1099-C on your tax return, you will also file a form 982 which indicates that you were insolvent. (If you weren't insolvent, you wouldn't have been able to file a chapter 7 bankruptcy). This will prevent any additional tax.

This can be found here: www.irs.gov/pub/irs-pdf/f982.pdf Your tax preparer will know exactly what needs to be done to ensure this is completed correctly and you are not subject to tax.

Hope this helps!

Expert:  Angie replied 1 year ago.

Do you have additional questions or concerns regarding this?
I'm happy to help anyway I can.

If your question has been resolved, positive feedback appreciated.

Hope you have a great day :)

Customer: replied 1 year ago.
my reading is that I would have to pay capital gains tax on the $30,000, and this is not canceled by my bk, although the debt forgiven is not taxable. Can you tell me more about this?
Expert:  Angie replied 1 year ago.

That would be true except for the insolvency clause....

As an example... My client last year received a 1099-C for a car that had been repossessed 10 years prior. The amount of the 1099 was around $10,000...this would have meant my client needed to pay approximately $1000 tax on this "income"....however because of my clients financial state, he was able to file the form 982 and prove insolvency.

To prove insolvency, you report your income and expenses (prior to the bankruptcy)

You can read about it in the instruction book...here: http://www.irs.gov/pub/irs-pdf/p4681.pdf

Because this was a rental property, and you had no basis, you don't have to worry about recovering depreciation.