Foreclosure and NOL

[Gary]

I have a client that had a residential rental home that was foreclosed. He received a 1099-A with the the balance of principal outstanding significantly greater than the fair market value. Since it was a recourse loan, the amount received, and thus the sale price is the fair market value which is much less than his basis in the home. The cancellation of debt from the 1099-C was entered as income on the Schedule E, but the result of the sale on the 4797 was still a large loss that results in an NOL.

The client is insolvent, so if I removed the cancellation of debt from the Schedule E, I would then have to reduce the tax attributes, i.e. the NOL. Doesn't it make sense to just include the cancellation of debt on the Schedule E, and ignore the fact that he is insolvent?

Thanks for any insights.

Gary

[JG EA]

I have a client that had a residential rental home that was foreclosed. He received a 1099-A with the the balance of principal outstanding significantly greater than the fair market value. Since it was a recourse loan, the amount received, and thus the sale price is the fair market value which is much less than his basis in the home. The cancellation of debt from the 1099-C was entered as income on the Schedule E, but the result of the sale on the 4797 was still a large loss that results in an NOL.

The client is insolvent, so if I removed the cancellation of debt from the Schedule E, I would then have to reduce the tax attributes, i.e. the NOL. Doesn't it make sense to just include the cancellation of debt on the Schedule E, and ignore the fact that he is insolvent?

Thanks for any insights.

Gary

This is a brain twister. If the sale resulted in a loss and created an NOL of say 100k and the COD is on the E of 50k would not that reduce the NOL already? So if the COD is taken off the E and the tax attribute is lowered would it be for the same amount?
If it is for the same amount then I can't see any harm in ignoring the insolvency.

[Gary]

Thanks

That's the way I see it. I just wanted confirmation.