Client had a short sale on residential rental. The cancelled debt is $70000. They were insolvent at the time of the cancelled debt. If they claim insolvency inorder to avoid the cancelled debt as income they wil also have to reduce the basic of the rental on the 4797 correct? The sale before reducing the debt generates a loss of $50000. Reducing the basis will generate a gain of $20000. First how do you report the basis adustment on the 4797. Is it short or long term. Sale and canceled debt both dated 10/22/2010.
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No. The reduction in basis, if applicable, is as of the start of the next tax year. Since they no longer own the property as of that date, there's no basis to reduce.
Make sure you consider higher priority tax attributes first. There could well be a NOL and/or capital loss that gets adjusted before the basis adjustment. See pub. 4681, and pay very close attention to the rules for both which exclusions come first and which tax attributes come first. Also pay attention to the elections, e.g. the election to reduce the basis of depreciable assets first (but that probably won't apply). -
Let me add, so that there's no confusion, the point about the reduction in basis applying to the next tax year is only true for the bankruptcy and insolvency exclusions. The Real Property Business Indebtedness exclusion has slightly different rules, where in theory it could apply in the current year (but not on a short sale alone).Comment
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COD rental
I think this says the same thing as Gary2 (I view his opinions as being among the best).
See DaveFogels articles if you like printouts as I do.Comment
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