1099-C pub 4681

[POCAHONTAS]

pub 4681,
page 7,
middle column heading Bankruptcy and insolvency,
Example in the middle of the column, subject Kyra

ok so everything in this example I understand until the very last paragraph
which begins "Kyra must reduce her ................... I understand the maths
and I understand that the basis have to be reduced by $91 and $9 for both
furniture and jewelery, but after I reduce the basis by those numbers, Is there anything else I need to do to complete form 982??

thanks

[erchess]

Post the example

Please post the example if possible. TY.

[POCAHONTAS]

Here is the example erchess

In 2005, Kyra bought a car for personal use. The cost of the car was $12,000. Kyra put down $2,000 and took out a loan of $10,000 to help with the purchase. The loan was a recourse loan, meaning that Kyra was personally liable for the full amount of the debt.

On December 7, 2008, when the balance of the loan was $8,500, Kyra was unable to make payments and the lender repossessed the car. The car had an FMV of $7,000 at the time of repossession. At the time of the repossession, the lender forgave the remaining $1,500 balance due on the car loan ($8,500 outstanding balance immediately before the repossession minus $7,000 FMV).

Kyra's only other assets at the time of the cancellation are the furniture in her apartment which has a cost basis of $5,000 and a FMV of $3,000, jewelry with a basis of $500 and a FMV of $1,000, and a $600 balance in her savings account. Thus, the FMV of Kyra's total assets immediately before the cancellation was $11,600 ($7,000 car plus $3,000 furniture plus $1,000 jewelry plus $600 savings). Kyra also had an outstanding student loan balance of $6,000 immediately before the cancellation, bringing her total liabilities at that time to $14,500 ($8,500 balance on car loan plus $6,000 student loan balance). Other than the car, which was repossessed, Kyra held all of these assets at the beginning of 2009. The FMV and bases of the assets remained the same at the beginning of 2009.

Kyra received a 2008 Form 1099-C showing $1,500 in box 2 (amount of debt canceled) and $7,000 in box 7 (FMV of the property). Kyra can exclude all of $1,500 canceled debt from income because at the time of the cancellation, she was insolvent to the extent of $2,900 ($14,500 of total liabilities immediately before the cancellation minus $11,600 FMV of total assets at that time).

Kyra checks box 1b on Form 982 and enters $1,500 on line 2. Kyra enters $100 on line 10a (the smallest of: (a) the $5,500 bases of Kyra's personal use property held at the beginning of 2009 ($5,000 furniture plus $500 jewelry), (b) the $1,500 amount of nonbusiness debt she is excluding from income on line 2 of Form 982, or (c) the $100 excess of the total bases of the property and the amount of money Kyra held immediately after the cancellation over Kyra's total liabilities at that time ($5,500 bases of property held immediately after the cancellation plus $600 savings minus $6,000 student loan).

Kyra must reduce her bases in her property in proportion to her adjusted bases in the property. Thus, Kyra reduces her basis in the furniture by $91 ($100 x 5,000/5,500) and her basis in the jewelry by $9 ($100 x 500/5,500).

I went through the example and everything fell into place except for the last paragraph, I understand the math in the paragraph but what do I do after I reduce the bases by 91 and 9 and for what?
thanks

[POCAHONTAS]

Ok so this is what I think the last passage means in the event you sell these assets you may then be liable for capital gains on that sale.

Am I correct??

Anyone Please

[rjholmes]

She has a new basis in these items for anything in which she needs to determine the basis, for instance another debt forgiveness. The furniture would now have a basis of $4909, and the jewelry $491.

[erchess]

Elaboration

If she keeps the assets until she deems them worthless and discards them, or if she loses them other than in a casualty or theft, no tax consequences.

If she gives the items to a an individual there are no tax consequences for either party at the time but technically her basis would become theirs and the IRS and Congress seem to assume that recipients are given and retain that information. .

If she donates the items to a charity then her deduction would normally be the lesser of fmv at the time or her basis. However during some years the deduction for some kinds of property might be allowed to be fmv if it is higher so one must keep one's eyes and ears open to changes in thee law.

If she loses the items in a casualty or theft her loss before limitations of $100 per event and 10% or whatever it is of agi is limited to her basis less insurance proceeds.

These items appear to be personal use assets so if she sells them for less than her basis we have a non taxable event but if she sells them for more than basis she has a taxable gain.

[POCAHONTAS]

thanks erchess

[POCAHONTAS]

ok I'd like to make a correction

It is page 9, 2008 publication 4681
under the heading "Bankruptcy, Insolvency and Qualified Midwestern Disaster Area Indebtedness"
first column the example is at the bottom of the column