COD Basis reduction

[Davc]

From the Pub:

"You can elect to reduce the bases of depreciable property you held at the beginning of 2011 before reducing other tax attributes. You can reduce the basis of this property by all or part of the canceled debt."

Is the character of the property determined at the time of the debt cancellation or on 1/1 of the following year?

Case in point a rental that was converted to the TP's principal residence later in the year of cancellation.

[Golden Rocket]

Try This

...and I'm telling you up front that many folks can shoot holes in the argument.

The debt cancellation is effective as of a certain date, right?

Treat the timing of the reduction in basis in accordance to your convention for dispositions.

Example: Jan 1, Original Value $100K, Accum Depr $20K. 5 yr double-declining. You have a convention for reporting dispositions effective Jun 30 regardless of the real date of disposition.

A 1099-C for $30,000 is in the works. Segment the asset into 2 distinct calculations, a)the amount being cancelled as a disposition b)the amount NOT being cancelled.

a) Calculation $30,000 as having been disposed, 5yr DD gives $12K but the 1/2 yr convention means only $6K is taken.
b) Calculation $70,000 with $20K already accumulated. 5 yr DD gives $20K. No 1/2 yr convention necessary.

New numbers as a result of the 1099-C: $100,000K OV. $20K accum as of 1/1. Total
depreciation calculated is $26 for the year per a) and b) above. New accumulated depreciation is thus $46K as of 12/31. Original value is $100K minus the $30K forgiven.

Next year begins with $70K original value and $46K as accumulated depreciation.

Clear as mud??

[Davc]

As we kept digging I think we found the answer and we don't like it.

Reg 1.1017-1(e)

(e) Depreciable property. For purposes of this section, the term depreciable property means any property of a character subject to the allowance for depreciation or amortization, but only if the basis reduction would reduce the amount of depreciation or amortization which otherwise would be allowable for the period immediately following such reduction. Thus, for example, a lessor cannot reduce the basis of leased property where the lessee's obligation in respect of the property will restore to the lessor the loss due to depreciation during the term of the lease, since the lessor cannot take depreciation in respect of such property.


That seems to say that it would have to be depreciable on 1/1.

[Nashville]

Choice

Seems to me the reduction of basis can be applied to an asset of the debtors' choice.

That would seem to suggest he could allocate the reduction to LAND, and thus not have to suffer the ill effects until the land was sold...

Am I missing something??