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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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On my non recourse RENTAL short sale, do I just reduce the

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On my non recourse RENTAL short sale, do I just reduce the basis by the COD?

Do I get to use all of my closing costs?

Lev :

Hi and welcome to our site!
You are correct - the basis is increase by your selling expenses.
Not all closing costs - for instance mortgage interest, real estate taxes included into closing costs are not added to the basis, But recording fees, real estate commissions, inspection costs, etc - are added to the basis.

Lev :

Because that is a non recourse loan - COD is NOT added to your basis - but the total amount of mortgage outstanding is treated as your selling price.

Lev :

No need to file form 982 and the basis of your property is not affected by COD.
If that is non recourse loan - in case of the short sale the outstanding debt is NOT reported as taxable income on form 1099C.
Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.
See for reference - http://www.irs.gov/uac/Home-Foreclosure-and-Debt-Cancellation

Customer:

Now I am confused. I have seller closing papers that show sales price as $90,000.00 and I have a 1099C Box 2 for $56,888.33 (box 5 is blank). SO WHAT IS MY SELLING PRICE, on IRS form 4797 (I think) ?

Lev :

If you received 1099C - either is not NOT nonrecourse loan or the lender reported incorrectly.
If the lender incorrectly issued form 1099C - you need to contact a lender asking for correction.
If that is a recourse loan - the form 1099C is correct - and your reporting must be different.

Customer:

The 1099C is correct. There is a paragraph in the short sales agreement that states: " Bank of America has waived their right to pursue collection of any deficiency following the completion of any deficiency, following the completion of the short sale, and your debit is considered settled" It also says that the Bank of America will report to the IRS on the appropriate 1099 form.

Lev :

If the form 1099C is correct - that is NOT a non recourse loan.
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.
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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 - but not below zero.
Your selling price is $90,000 and the form 1099C reports the $56,888 forgiven debt.

Customer:

Oops I copied the words wrong, it should say: " Bank of America has waived their right to pursue collection of any deficiency, following the completion of the short sale, and your debit is considered settled" It also says that the Bank of America will report to the IRS on the appropriate 1099 form.

Customer:

Thank you

Customer:

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 - but not below zero.
Your selling price is $90,000 and the form 1099C reports the $56,888 forgiven debt.

Lev :

Requirements to issue the form 1099C is not based on the agreement but is based on the IRS regulations. So the wording about issuing the form 1099C in your agreement are irrelevant. The clause might add clarification - but that is actually based on IRS regulations not on the agreement between the bank and you.

Lev :

Your basis for calculating the gain or loss must be reduced by the amount of debt forgiven - $56,888 in this situation.
On form 4797 - you will calculate gain or loss as $90,000 (selling price) - (adjusted basis)

Customer:

OK Thank you for your help on this......

Lev :

You are welcome.
Sorry for confusion. I hope we are clear now that is a recourse loan - and that is why form 1099C is issued.

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