Form 982 - Insolvency

[LCP]

I'm looking at the instructions and getting a little confused regarding certain "elections".

Is excluding forgiveness of debt income as a result of insolvency an election in and of itself? If so I think the client I'm looking at who reported it in 2007 is screwed.

Or are the elections that must be made just diferrent options that exist like reducing the basis of certain assets.

[snowbird]

Your reference to "elections", are your referring to Part I or Part II? My understanding of Part 1, is that this is the order you must select from, ie., if no bankruptcy, then insolvency, etc. The exception is the principal resident, you can select to use insolvency instead. When it comes to Part II, the TP can reduce basis instead of the others in order such as NOL, business credits, etc.

[JG EA]

I learned this year that you do reduce the basis of your stuff by the insolvency amount.Line 10a on Form 982.
So, if all a client has left is clothes then remind them that if they sell them in a yard sale the basis is zero. (Insult to injury.)

But you do not do this if your amount in Part 1 is for "Discharge of qualified principal residence indebtedness". (Pub 4681 has examples when residence is involved.)