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I received a 1099c for cancellation of debt and a 1099s for…

I received a 1099c...

I received a 1099c for cancellation of debt and a 1099s for a short sale on a piece of land I bought in 2005 paid 155k for and it is worthless sold for $7990, is there a way to do my taxes where I won't be hit with a huge tax bill, turbo tax tells me to

Accountant's Assistant: The Accountant will know how to help. Is there anything else the Accountant should be aware of?

Here's the scoop. Based on the information you provided, the cancelled debt qualifies to be excluded from your income under what is called an insolvency exception (meaning your liabilities associated with the property are higher than your asset value.)

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Customer reply replied 1 year ago
My cancellation of debt amount is $66364.00
Answered in 43 minutes by:
2/16/2017
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 31,220
Experience: Taxes, Immigration, Labor Relations
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Can you verify if that land was your INVESTMENT property?
If yes - you might be able to deduct the loss.

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Customer reply replied 1 year ago
it was bought as a investment, this is not my primary residence, could I say it was a business property even thou I don't own a business?

That would not be a business property - but INVESTMENT property.

If it were your business property - you would be eligible to exclude that cancelled debt from taxable income.

In your situation you would be ONLY eligible to exclude if you are insolvent.

However - you will be able to deduct capital loss realized fro teh disposition of your investment property.

That loss may be fully used toi offset other capital gains - nut if you have net capital loss - only $3000 may be used every year to offset other taxable income - and the rest will be carried forward to following years.

Let me know if you need any help with reporting.

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Customer reply replied 1 year ago
how would the IRS know if it was a business property or not ? So to claim insolvent would I qualify does it go by all my assets (401k) included against all my liabilities ? So if I can only go the capital loss way , I can only deduct 3000 a year , won't I still have a big tax bill due this year thou, or does it delay my big tax bill dread out over years?together me and my wife make 124k , my cancellation of debt is for $66364,

So how would the IRS know if it was a business property or not ?

That is based on what you report on your tax return.

Basically - how the property is used - you will determine - and report to teh IRS on your tax return.

The IRS may audit and verify your determination later - but that is your determination.

So to claim insolvent would I qualify does it go by all my assets (401k) included against all my liabilities ?

Yes that is correct - there will be a special worksheet on which you list ALL your assets and all debts.

You are insolvent - if your debts are more than your assets.

You will include all debts and assets on the day BEFORE the debt was cancelled (see date on 1099C)

So that cancelled debt is included.

Yes - you will include the value of you 401k plan as well.

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Customer reply replied 1 year ago
Well I can't go the insolvency way , too much asset . So if the property was used as a business I grew tropical plants on it , will that show a red flag ? I just don't know how they could say I didn't, if I go the capital loss way am I going to still have a huge tax bill this year ?

That is not a red flag - if you do have a business and report business income and loss on schedule C all these years.
But if no business activities were reported - then it might attract IRS attention.

If you do run a business - and that land was used for business operations - you will exclude that COD income on form 982 and will reduce your basis by excluded amount.

So your basis will be $155k - $66364 =

and correspondingly your loss will be less.

In additional that loss will not be subject to capital loss limitation - and will be deducted as ordinary loss on form 1040 line 14.

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Customer reply replied 1 year ago
I'm confused on last answer , so if I go the capital loss way , does the $66k add to my income and can only subtract 3k from the amount , 124+66k=190-3=187, then I have to pay fed and state tax which comes out to around 20k, or is the some other deduction for the 66k loss

Your question was about classification of that land as BUSINESS property - and that what I addressed above.

If that is NOT your business property - but INVESTMENT property - you will report

- COD income from 1099c - on form 1040 line 21

- capital loss on form 8949 - will be transferred to schedule D and only negative $3000 will be on 1040 line 13

Your federal and state tax liability is calculated based on TOTAL income.

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Customer reply replied 1 year ago
basically your telling me I'll be paying a big tax bill? Can one of those places like optima tax relief help me or they scams ?

Basically - you realized income that is called COD - cancellation of debt income.
When you took a loan - that amount was not included into your income - correct? That was because there were realistic expectations that the loan would be paid off.

That is regardless how these loaned money were used.

When it became obvious the loan will NOT be paid back - COD income is recognized. That is related to the money given time ago when the loan was taken.

The law provides some relief for such situations - including what we discussed above.

For instance - if you are insolvent - you are eligible to exclude COD from gross income.

But there is no magic - and if you are not eligible to any type of relief - nobody would help here...

Types of available relief are listed on form 982

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

1
Amount excluded is due to (check applicable box(es)):
a Discharge of indebtedness in a title 11 case
b Discharge of indebtedness to the extent insolvent (not in a title 11 case)
c Discharge of qualified farm indebtedness
d Discharge of qualified real property business indebtedness
e Discharge of qualified principal residence indebtedness

What we need to do - to verify if you qualify for any of listed options.

Lev
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Satisfied Customers: 31,220
Experience: Taxes, Immigration, Labor Relations
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