1099-C Rental Property

[Snaggletooth]

Taxpayer bought residence for $200K in 2006. A job change took him to another town, then the economic setback dug in and he couldn't sell his old home.

Converts residence to rental property and depreciates some $12,000 for late 2007, 2008, and 2009. Rent collections are not adequate to cover debt service and also not received each month. After falling behind on the mortgage, bank short sells the home for $140,000 leaving an unpaid mortgage of $188,000.

Mortgage company sends taxpayer a 1099-C for $48,000. ($188-$40).

Taxpayer has ruined the treatment of this home being his personal residence, but bails out of tax liability due to insolvency. QUESTION: Does the $12,000 depreciation have to be recaptured?

[David1980]

So if not excluding the cancellation of debt due to insolvency it would look very simple.

$48,000 of income added to Schedule E from the cancellation of debt.

A sale of a rental house for the sale price of $140,000 with a current basis of $188,000 ($200,000 less the $12,000 depreciated). Or a loss of $48,000 on 4797.

Neat and tidy.

Now if I'm reading the 982 instructions correctly, for insolvency you mark 1b, enter amount excluding in 2, and then enter the same amount in 10a. On 10a that would be the smallest of the taxpayer's basis, the amount of non-business debt included on 2 (so if like a primary home and also a rental home was foreclosed), or the excess of the aggregate bases of the property and the amount of money you held immediately after the discharge over your aggregate liabilities immediately after the discharge. (I think that last one boils down to not excluding more than you were insolvent for.)

So how does that work exactly? Do you instead of reporting the $48,000 as income on Schedule E exclude it, but then reduce the basis of the rental by $48,000 resulting in a sale of property with a basis of $140,000 for $140,000?

[Snaggletooth]

Thanks, but

David thanks for reading and responding to the post, but the original question wasn't addressed.

If insolvency (or some other exemption) is successfully claimed, is there still a requirement to recapture depreciation? I've read so much information and there might even be something in TTB but I can't seem to successfully navigate to it.

I also didn't realize it until you responded, but the numbers worked out co-incidentally to zero gain or loss absent any special treatment. This was a coincidence, and not intended.

[Gretel]

Ron, here are my thoughts.

1. Issue debt forgiveness is resolved since insolvent.

2. Issue sale of rental: When property was converted to rental what was the FMV? Was it already lower than purchase price? The lower value should be used for depreciation and as his basis for the sale. Then deduct depreciation from that basis and see if any gain is left. That gain then is taxable or the loss deductible.