1099-C Rental

[Harvey Lucas]

Client bought rental in 2007 for $400,000.

Financed 100%.

In 2009, the mortgage company agreed to reduce the mortgage debt by $140,000 because the value of the property tanked and they did not want the property.

My client still owns the property.

The mortgage company issued a 1099-C for the $140,000 forgiven debt.

My client was not insolvent at the time the debt was forgiven.

I am hoping that the $140,000 is not taxable under one of the exclusion rules.

The most obvious is "The debt is qualified real property business debt"

If this is the case, I file form 982 and reduce the basis of the property by $140,000.

Sound OK?

Thanks,

Harvey Lucas

[appelman]

It was incurred or assumed in connection with real property used in a trade or busine

"It was incurred or assumed in connection with real property used in a trade or business." That is a requirement for qualified real property business debt. Rental is not a trade or business.

[SFBOB]

Pub 544 Sales and Other Dispostion of Assets

My suggestion would be use form 982 Part I Line 1 D check the box
Part I Line 2 enter the 1099C amount
Part II Line 5 enter the Part! Line 2 amount and reduce the basis and depreciation in future years.

Download Pub 544, read page 28 Section 1231 Transactions first paragraph 1/2 way down."Generally property held for the production of rents or royalties is considered to be used in a trade or business".

I have always taken the position that sale of a residential rental at a loss is an ordinary loss and sale at a gain is capital gain.Depreciation of appliances and other assets not subject to macrs 27 1/2 years would need to be recaptured and taxed as ordinary income.

There have been many court cases through the early years that took the side of the tax payer and confirmed residential rentals are a trade or business.

The decesion is of course yours. My quess is that the taxpayer does not want to pay taxes on $140,000 of cancelled debt which is ordinary income. Have a good evening Bob

[SFBOB]

Non Qualified Debt???

One other caution in the example. Refinance money used for purposes other than to improve the property cannot not be exclude from income by reducing basis in the property.Good Luck with your research.

[Burke]

One other caution in the example. Refinance money used for purposes other than to improve the property cannot not be exclude from income by reducing basis in the property.Good Luck with your research.

Good point.

[luke]

not refinance

One other caution in the example. Refinance money used for purposes other than to improve the property cannot not be exclude from income by reducing basis in the property.Good Luck with your research.

The op does NOT say anything about "refinance" ? I agree that rental should be considered "trade or business"....

[Harvey Lucas]

Thank You

Thanks everyone.

Harvey Lucas