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I received a 1099-C with box 5 checked (personally liable).

This is a rental property...
I received a 1099-C with box 5 checked (personally liable). This is a rental property that was a short sale. Am I required to claim this amount as income even though the property is in Washington state, which is a non-recourse state? The amount to be claimed is pretty substantial.
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4/2/2013
Lev
Lev, Tax Advisor
Category: Tax
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LEV :

Hi and welcome to Just Answer!
Yes - you are personally liable and that is a recourse loan. you are expected to report the forgiven debt on your tax return.


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Considering your situation - you do qualify to exclude the canceled debt as "qualified real property business indebtedness" - 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 $100,924 on the line 2 and on line 4 and line 10a.


The line 10 is specifically to reduce the basis.






The disposition of the property is reported on Form 4797 - http://www.irs.gov/pub/irs-pdf/f4797.pdf - is to report the disposition of business property - rental property in your situation. To calculate your gain or loss - you will use an adjusted basis reduced by the amount of debt forgiven.



So you might have a gain or a loss on the disposition.



Customer:

The loan was originally an owner occupied, so I am still thinking it may be classified as a non-recourse instead of recourse. Washington state is a non recourse state.

LEV :

Debt for which a borrower is personally liable is referred to as recourse debt. Because the box 5 on form 1099C is checked - the IRS will treat the amount of forgiven debt as your income. If you will not report it - you will likely get a letter with proposed assessment.
If you think that form 1099C is not correct - you may contact a creditor and ask for correction.

LEV :

The tax impact depends on the type of debt - recourse or nonrecourse.


If a lender cancels a debt and issues Form 1099-C, the lender will indicate on the form in box 5 if the borrower was personally liable (recourse) for repayment of the debt.

Customer:

I assumed that all loans in WA state are non recourse, therefore box 5 may have been marked by mistake??? Is that correct?

LEV :

Assumptions that all loans in WA state are non recourse - is not correct. It is possible a mistake - but to verify if that is a mistake or not - you need to contact a creditor.
So far - based on reporting - the IRS will assume that as a recourse loan.

Customer:

Ok thanks. I will look into this right away. If it is not a recourse loan, it looks like I may be able to reduce the tax liability with the 982 form. Any amount would help as the 1099-C is almost $200K.

LEV :

If you think that the form 1099C is issued incorrectly - your first step to contact a creditor and ask for correction. However you are expected to provide your arguments.

Customer:

I will look at the original loan docs and call the creditor. Thanks for your help.

Lev
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