1099-C (Cancellation of Debt) - Proper Reporting

[Uncle Sam]

A client purchased residential rental property in 2000.
Land $ 7,300
Building 65,696
Acc Depr -16,026 (at 12/31/07)
There are some unamortized refinance costs of $ 3190.
and suspended losses of $ 2426.

Not being able to find a tenant he was not able to pay the mortgage since 2007. Client is NOT a real estate professional, as he has a full time job, and this rental was only an investment activity.

In 2008, in order to completely relinquish his interest in the property, the mortgage company must have foreclosed and gave him a discharge of debt - issued Form 1099-C, Box 2 of $ 39,783. No amount for interest.
There was NO personal use of the house. He had a separate personal residence in another town.

Does my client qualify for Form 982 exception 1d - Discharge of qualified real property business indebtedness where I need to reduce the tax attribute (basis) by the $ 39783? (From what I read, the discharge amount is properly reported by increasing Accumulated Depreciation).

As far as I know (and I need to get more specifics) - this was NOT a bankruptcy, he received absolutely no other funds

Is this now a Form 4797 long term loss for
$ 17,187? (7,300 + 65696 - 16,026 - 39,783)

[Snaggletooth]

Simpleton's Approach

Sam, in my simpleton approach I would treat this just as if it were sold to an uninterested party for the $39,783. In my mind, I would report a 4797 loss for $22,803. I would use your calculation, plus I believe suspended losses, a la 8582 stuff are released upon disposition. If there are capitalized finance charges, they should be deducted as well.

This thing sounds like an anomaly somewhere. I trying to think of circumstances where the simpleton 4797 approach wouldn't work. Obviously, if the discharge was coupled with other transactions, that would be one. Not really sure what would the situation would be if the FMV was significantly more than the discharged debt. Even if this were the case, the excess is STILL not economically available to the former owner, and your post mentions nothing about a related party.

No bankruptcy is involved. I wouldn't be surprised if there is more to the story.

[Gretel]

I believe the "sale" needs to be reported at FMV of property at time of transfer to bank.

Then the second step would be to look at debt forgiveness. If TP is not insolvent then this is taxable income to extent of solvency. Solvency includes everything including retirement accounts. Any amount used for insolvency then will reduce taxable attributes.

[Nashville]

Bump it Up

I posted to bump this upstairs. Would like to read more comments on this subject. Thanks, Nashville

[Gretel]

Bump #2. I too would like to see some other opinions.

[JG EA]

I believe the "sale" needs to be reported at FMV of property at time of transfer to bank.

Then the second step would be to look at debt forgiveness. If TP is not insolvent then this is taxable income to extent of solvency. Solvency includes everything including retirement accounts. Any amount used for insolvency then will reduce taxable attributes.

Agree also.
See See TTB 14-10.

For what it is worth my not so complete summary that may or may not be totally correct:

Summary of Cancellation of Debt Income

1099-A Abandonment or Foreclosure
On D/4797:
If liable to repay debt (Recourse Debt) Sale price is lower of Box 2 or 4
If not liable (Non Recourse) Sale price is Box 2
Basis is purchase price + improvements, etc.

1099-C Cancellation of debt
Line 21:
Sometimes combined (pooled together) all information on 1099C
Any cancellation of debt over FMV on line 21

[Over FMV is COD (unless 982 insolvent, etc.)
COD is income.
2 transactions like sold to bank.
D if personal gain/loss plus line 21.
4797 if business type assets
If FMV and mortgage are the same – no cancellation of debt]

If at the end you are able to use 982 and have an excess of insolvent money then assets have to be reduced. If the only thing left is personal assets (clothes on back, etc) then their basis is reduced to as low as zero.

[Uncle Sam]

1099-c

I still need to get more facts from the client - re: FMV and outstanding mortgage balance at time of foreclosure.

So far, from what you're advising me based only on my above stated facts, instead of 982'ing the 1099-C debt cancellation amount to reduce the basis, then 4797'ing the remaining basis with -0- sales price,

the transaction gets reported by picking up the debt cancellation amount as miscellaneous income on line 21, and reporting a 4797 transaction by using FMV as sale to adjusted basis for cost.

[Gretel]

Agree also.
See See TTB 14-10.

For what it is worth my not so complete summary that may or may not be totally correct:

Summary of Cancellation of Debt Income

1099-A Abandonment or Foreclosure
On D/4797:
If liable to repay debt (Recourse Debt) Sale price is lower of Box 2 or 4
If not liable (Non Recourse) Sale price is Box 2
Basis is purchase price + improvements, etc.

IMHO basis is purchase price + improvements - reduction amount for tax attributes (if applicable). I think tax attribute need to be applied first to the property at hand.

1099-C Cancellation of debt
Line 21:
Sometimes combined (pooled together) all information on 1099C
Any cancellation of debt over FMV on line 21

[Over FMV is COD (unless 982 insolvent, etc.)
COD is income.
2 transactions like sold to bank.
D if personal gain/loss plus line 21.
4797 if business type assets
If FMV and mortgage are the same – no cancellation of debt]

If at the end you are able to use 982 and have an excess of insolvent money then assets have to be reduced. If the only thing left is personal assets (clothes on back, etc) then their basis is reduced to as low as zero.

Otherwise I agree with the evaluation. This is a tough one to deal with. First for the people effected and then they are effected again by the tax prep fees.

[Uncle Sam]

1099-C - Update

To those of you who previously posted - I thank you.

However, revelation of some new facts to this case - change the outcome of the tax treatment.

As previously stated - purchased in 2000
Land $ 7,300
Building 65,696
Acc Depr - 16,026 (12/07)
Basis = $ 56,970

1099-C had $ 39783 for amount of debt cancelled, no interest, box 7 FMV $ 175,000

What happened was - 2 years ago, client refinanced AND ADDED an additional $ 90,000 to the refinance as home equity for his PERSONAL RESIDENCE.

No interest of any kind was taken in 2007 as he did not pay any mortgage payment.

So the refinanced debt was $ 217,000. Some of it was paid in 2006. Assume $ 2,000.

Since the FMV of the house was all the mortgage company was able to sell the house for was $ 175,000 (the actual debt on the rental house) the difference ~ was the forgiven debt ($ 39,783). ($ 215 - $ 175)

Pub 4681 P. 3 states that a taxable event must be reported as ordinary income, in this circumstance, from the cancellation of debt on Schedule E.

Therefore what I'm going to do is report the $ 39,783 on Schedule E, then report the disposition of the rental property on Form 4797 by reporting the sale as $ 175,000-$ 90,000 = $ $ 85,000, and cost of $ 56,970.

Just thought you should know what the ending result is just in case you get something like this.
Virtually all the information I saw and read pertained to foreclosures, repossessions, and cancellation of debt pertaining to PERSONAL RESIDENCES.

[Gretel]

To those of you who previously posted - I thank you.

However, revelation of some new facts to this case - change the outcome of the tax treatment.

As previously stated - purchased in 2000
Land $ 7,300
Building 65,696
Acc Depr - 16,026 (12/07)
Basis = $ 56,970

1099-C had $ 39783 for amount of debt cancelled, no interest, box 7 FMV $ 175,000

What happened was - 2 years ago, client refinanced AND ADDED an additional $ 90,000 to the refinance as home equity for his PERSONAL RESIDENCE.

No interest of any kind was taken in 2007 as he did not pay any mortgage payment.

So the refinanced debt was $ 217,000. Some of it was paid in 2006. Assume $ 2,000.

Since the FMV of the house was all the mortgage company was able to sell the house for was $ 175,000 (the actual debt on the rental house) the difference ~ was the forgiven debt ($ 39,783). ($ 215 - $ 175)

Pub 4681 P. 3 states that a taxable event must be reported as ordinary income, in this circumstance, from the cancellation of debt on Schedule E.

Therefore what I'm going to do is report the $ 39,783 on Schedule E, then report the disposition of the rental property on Form 4797 by reporting the sale as $ 175,000-$ 90,000 = $ $ 85,000, and cost of $ 56,970.

Just thought you should know what the ending result is just in case you get something like this.
Virtually all the information I saw and read pertained to foreclosures, repossessions, and cancellation of debt pertaining to PERSONAL RESIDENCES.

Thanks for the update, Uncle Sam, especially for the where to report info.

I am not quite clear why you reduce the "sales price" by $90,000. I thought he included $90,000 in the rental loan for his personal residence. Maybe the FMV includes $90,000 as the value for this residence as well? Would be quite a coincidence if loan added was the same as FMV today.

[Uncle Sam]

The reason for my reducing the "selling price" of the property, is because $ 90,000 of the FMV was really a payback for the personal residence debt attached to the refi - which had nothing to do with the rental property - so really the FMV (selling price for rental property)was $ 85,000 strictly for the rental property.

But this stinking mess actually poses another problem - how does anyone determine how much of EACH portion of the debt forgiven belongs to the rental vs the personal residence?

I MIGHT yet have to allocate the $ 39,000 between Form 1040, line 21, and Schedule E.

As an aside having NOTHING to do with this - this afternoon this same client faxes me a copy of the contract he paid $ 9,500 for installation of an air conditioning system for his personal residence - installed like in October 2008 - wanting the residential energy credit. Looking up the rules - when Congress did the bank bailout in September - they extended it for 2009 BUT NOT 2008.

[Gretel]

The reason for my reducing the "selling price" of the property, is because $ 90,000 of the FMV was really a payback for the personal residence debt attached to the refi - which had nothing to do with the rental property - so really the FMV (selling price for rental property)was $ 85,000 strictly for the rental property.

But this stinking mess actually poses another problem - how does anyone determine how much of EACH portion of the debt forgiven belongs to the rental vs the personal residence?

I MIGHT yet have to allocate the $ 39,000 between Form 1040, line 21, and Schedule E.

As an aside having NOTHING to do with this - this afternoon this same client faxes me a copy of the contract he paid $ 9,500 for installation of an air conditioning system for his personal residence - installed like in October 2008 - wanting the residential energy credit. Looking up the rules - when Congress did the bank bailout in September - they extended it for 2009 BUT NOT 2008.

Boy, will you be glad when this client is dealt with. I am missing out on the energy credit myself and still have some hope that this is part of the new package.

Back to your $90,000 allocation. Are you sure the FMV is not just for the rental? Why would the bank include the residence in this? Of course, it is included in the total debt forgiveness but FMV should be for rental only, I think.

[Uncle Sam]

1099-c

Gretel - When the client refinanced 2 years ago - the bank loaned my client an additional $ 90,000 to the debt which acted as a home equity line of credit for his personal residence - so at the time he held a debt of $ 217,000 ($127,000 refinance for rental property + $ 90,000 for LOC on his residence).
Real estate values of course went DOWN since 2 years ago.
Not having a tenant to pay rent - he couldn't pay the mortgage so he didn't make one payment in 2007 or 2008.
So assuming during 2006 his mortgage principal went down $ 2,000.

$ 215,000 - $ 40,000 (debt forgiven) = $ 175,000.

$ 175,000 was the MOST the bank was able to get selling it.

So I can only assume that "selling price" for the rental portion is $ 175 - $ 90.

[Snaggletooth]

Thanks for Follow-Up

Sam, thanks for the follow-up. I was curious to see what was at the bottom of this strange situation. I suspected that somewhere there was Paul Harvey's "Rest Of The Story."

And I would have handled the same way you did. 4797 with a little extra deemed-to-be-proceeds.

[Gretel]

Gretel - When the client refinanced 2 years ago - the bank loaned my client an additional $ 90,000 to the debt which acted as a home equity line of credit for his personal residence - so at the time he held a debt of $ 217,000 ($127,000 refinance for rental property + $ 90,000 for LOC on his residence).
Real estate values of course went DOWN since 2 years ago.
Not having a tenant to pay rent - he couldn't pay the mortgage so he didn't make one payment in 2007 or 2008.
So assuming during 2006 his mortgage principal went down $ 2,000.

$ 215,000 - $ 40,000 (debt forgiven) = $ 175,000.

$ 175,000 was the MOST the bank was able to get selling it.

So I can only assume that "selling price" for the rental portion is $ 175 - $ 90.

Uncle Sam, I still don't agree with the approach to lower the "selling price" by $90,000. I read TTB pg.14-11 & 14-12 again and looked at the example. I think how T/P used $90,000 has no bearing on the situation, it was secured by rental.

But this one is a toughy. Bring some good arguments why you would want to lower "selling price".