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My name is ***** *****. I lost raw land to deed inlieu of

Customer Question
Customer: Hello, My name is...
Customer: Hello, My name is ***** *****. I lost raw land to deed inlieu of foreclosure. I was told that the debt forgivness is taxable. But I don't understandy why I cannot offset the loss in value against the devt forgivness. There has to be a legal way to not pay taxes on 100k that I never earned. If I had that kind of money, I never would've lost the land to begin with.
JA: Thanks. Can you give me any more details about your issue?
Customer: I bought raw land at the beach in 2006 and made payments for a few years. When the market went bad, so did the value of the land from 200k down to about 80k. I saw no end in sight and couldn't make payments anymore so I did a deed in lieu of FC and was given a 1099 for about 110k. As you can imagine it was a huge hit, but since my investment lost value in the same amount, I don't know why I couldn't off set it. Also I gave the bank a deed so it was techinically a sale, and I thought the loss from a sale could be offset.
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Submitted: 1 year ago.Category: Tax
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Answered in 21 minutes by:
1/16/2016
Tax Professional: Lev, Tax Advisor replied 1 year ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,150
Experience: Taxes, Immigration, Labor Relations
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Several issues...
the debt forgiveness amount generally is taxable - that is correct.

However under some circumstances you may exclude that amount from taxable income for instance - if you are insolvent.

We cannot deduct the loss in value - that is correct - but we might deduct capital loss which is calculated as (assumed sale price) MINUS (adjusted basis).

You may ONLY deduct capital loss if that was an investment or business property. No deduction is allowed on the loss of a personal property.

Generally we need to handle these two items separately - the debt forgiveness and disposition of teh property.

Please verify your circumstances. I am here to help you.

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Tax Professional: Lev, Tax Advisor replied 1 year ago

1.

When the debt is forgiven and it becomes obvious that it will not be paid back - that amount is classified as COD - cancellation of debt (COD) income - and it is income recognized because loans are cancelled.

In general, you must report any taxable amount of a canceled debt for which you are liable as ordinary income from the cancellation of debt, on Form 1040.

2.

In general - that is taxable income and reported on form 1040 line 21.

HOWEVER under certain conditions - you might be able to exclude COD income from taxable income.

3.

You MIGHT qualify for the insolvency exclusion.When you prepare your Insolvency Worksheet - you need to determine if you were insolvent.

The worksheet may be found on page 8 in this publication -

http://www.irs.gov/pub/irs-pdf/p4681.pdf

You list all your assets and all liabilities - on the day before the loan was forgiven - so include that loan into the worksheet.This worksheet is not sent with your tax return - just keep it for your record.Do not send any supporting documents and do not send that Insolvency Worksheet - to the IRS - just keep for your record.

4.

That exclusion is claimed on form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness.

and that form 982 should be included into her tax return.

-check the box 1(b) and list excluded amount on line 2.Here is the form -

www.irs.gov/pub/irs-pdf/f982.pdf

.
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If you still have any doubts, need clarification - please be sure to ask.
I am here to help you will all tax related issues.

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