1099-A Rental Property

[PAULHA]

I have a tax client that received a Form 1099-A for 2011.

Here are the facts:

1.The property is located in Arizona and was purchased on 12.6.2004 and couple lives in Ohio.

2. The property was bought with the intention of making some improvements and then flipping it (INVESTMENT). It was never intended to be a residence.

3. Purchase price was $200,000 with a $40K down payment.

4. After the improvements were made the t/p's attempted to sell the property during the period of 2006 through 2008 to no avail. At the end of 2008 the property was put up for rent and the property was rented at the end of 2008 through 2009. The property has not been rented since 2009 and the t/p's stopped making mortgage payments starting in 2010.

5. During the rental period depreciation was taken on the property.

6. All improvements and other expenses incurred such as real estate taxes were capitalized during the period the property was not occupied.

The t/p's received a Form 1099-A for 2011 with the following information:

Block 1 Date of Aquisition 2.25.2011
Block 2 Balance of principal outstanding $170,759.38
Block 4 FMV $80,000
Block 5 was not checked which leads one to believe the t/p is not liable and therefore debt is non-recourse

This is my first experience with a Form-1099-A regarding rental property and therefore would like to do it correctly and appreciate your comments and guidance.


After much research and confusion, I have concluded that the property under IRC 108(c)(3)(A) would qualify to be treated as Qualified Real Property Business Indebtedness. As such, loss from the abandonment of business or investment property is deductible as an ordinary loss, even if the the property is a capital asset.

Since the the property has been foreclosed and a deemed sale taken place-a gain or loss on the sale must be figured.

My calculation of gain <loss>

Amount Realized From Sale $170,759
Cost Basis Of Property $220,413
Depreciation Taken - 8,943
Adjusted Basis 211,470
Loss On Sale -40,711

Loss on sale will first be reported on Form 4797 and flow through to the 1040 as an ordinary loss.

Again, I appreciate your comments and guidance.

Thank you

[PAULHA]

Bump Up

I have done additional research regarding non-recourse debt and realize it is state specific.Under Arizona law, any loan used to purchase a home is generally no-recourse debt, that is, the owner has no personal liability for the loan See Arizona Revised Statutes Section 33-814-G and realize

[JG EA]

I was going to answer yesterday and got started and it seemed too complex without some kind of foundation. There are several issues here. So, I'll ask you back one question and maybe someone will know where to go from there. Is this flipping activity a Schedule C activity for your client or was it an investment activity ?

[PAULHA]

1099-a Rental Activity

JG

This is not a Schedule C activity (as in a professional real estate person). This purchase was an investment activity. Intent was to make improvements and sell. Could not sell so t/p turned into a rental before abandoning the property. My thinking is to treat this a a loss on business property.

[JG EA]

JG

This is not a Schedule C activity (as in a professional real estate person). This purchase was an investment activity. Intent was to make improvements and sell. Could not sell so t/p turned into a rental before abandoning the property. My thinking is to treat this a a loss on business property.

Okay, so you are reporting the "sale" on a 4797 as you said. So, is your main question about the COD? Most people say wait until you receive the 1099C. Do you know that the debt is actually cancelled?

[PAULHA]

1099-a Rental Activity

According to the Arizona Statute this is a non-recourse loan and therefore there is no canceled of debt because the t/p is not personally liable-makes sense because block 5 of Form 1099-A is not checked.

According to the instructions for abanonments on page 12 of Pub 4681, Loss is deducted in the year the loss is sustained.

New Information just received from t/p: the t/p just faxed me a copy of a document that the property was sold at public auction on March 3, 2011 for $72,000.00.

[Gary2]

I have done additional research regarding non-recourse debt and realize it is state specific.Under Arizona law, any loan used to purchase a home is generally no-recourse debt, that is, the owner has no personal liability for the loan See Arizona Revised Statutes Section 33-814-G and realize

I'm not familiar with AZ law on this matter, but does it apply to any purchase of residential real estate? Or only if it's going to be owner occupied?

[PAULHA]

ARS 33-314-G State:"If trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling is sold pursuant to the trustee's power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs and expenses."

[taxmom34]

why are you quoting trustee regs, it wasn't a trust that sold the property was it?

[Gary2]

why are you quoting trustee regs, it wasn't a trust that sold the property was it?

Arizona, like many western states, uses deeds of trust instead of the mortgages we see in Massachusetts. So, technically it was a trust that sold the property.

[Burke]

I have the exact same situation this year, and I am handling it in the exact same way as you have outlined. Only the TP has a BIG gain. Good thing he has a large c/o capital loss to offset it. The man is luckier than God. Never seen anything like it.