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Was looking on the article for cancellation of debt. I

Hi, was looking on...

Hi, was looking on the article for cancellation of debt. I received a 1099c for $35k on a rental property I own. I have over $100k in passive loss carryforwards. Can I reduce the carryforwards to offset the discharge? Is so, how do I report?

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2/23/2017
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 14,228
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Hi.

...

There is a listed order in which you must reduce basis (i.e., reduce any x to zero, then y to zero, then z to zero, etc).

...

IRC §108(b)(2).

...

See this from IRS:

...

If a taxpayer qualifies for the bankruptcy, insolvency or qualified farm indebtedness exclusion, then the amount of the exclusion must be applied to reduce the taxpayer’s “tax attributes” in the order listed below:

• Net operating loss (NOL) of the year of the debt discharge and any carryover to that year;

• General business credit carryovers to or from the year of the debt discharge;

• Minimum tax credit as of the beginning of the year following the year of the debt discharge;

Capital loss of the year of the debt discharge and any carryover to that year;

• Basis of property;

• Passive loss carryover from the year of the debt discharge; and

Foreign tax credit carryovers to or from the year of the debt discharge

...

Losses and basis are reduced by the excluded COD income dollar-for-dollar, tax credits are reduced $1.00 for every $3.00 of COD income.

...

You'll then simply retain remaining basis applicabe assets or carryovers, for purposes of reporting in future years

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
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Customer reply replied 1 year ago
What happens if the taxpayer is not insolvent or bankrupt. Can he still offset the passive losses?
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There is also the “Qualified real property indebtedness” exclusion.

...

“Qualified real property indebtedness” is, generally, debt that meets all of the following conditions: (i) it was incurred or assumed in connection with real property used in a trade or business; (ii) it is secured by real property; (iii) it was incurred or assumed after 1992.

...

The amount of debt you can exclude from income is limited to the excess, if any, of the outstanding principal amount of the qualified real property business indebtedness immediately before the cancellation, over the fair market value, immediately before the cancellation of a mortgage securing the debt, reduced by the outstanding principal amount of any other qualified real property business debt secured by that property immediately before the cancellation.

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You'll see the box for that on form 982 at 1d

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