I am a little nervous with these numbers

[AZ-Tax]

My client who bot his residence in 2006 for $539K, converted to rental in 2009 (rental cost basis $350K fmv at time took $26K depr over 2yr 3mos), abandoned property in March 2011 & received 1099-A for 2011 w/$370K “principal outstanding” therefore TP had $169K of equity in house, correct? Entered 1099-A data, in part 2 “cancelled debt worksheet” #7 other real property #8 rental property & # 9 abandonment. Part 3 generated - $160K on line G. In Bus, Farm & Rental smart worksheet I linked to TP’s Sch E.

In rental asset worksheet I disposed of rental property in March 2011at a sale price of (left blank). A client since 2004 thus my software tracked the depr but TP’s AGI to high in 09 & 10 to take any rental loss. Now the results have gotten me a little nervous. $169K of 4797 losses and since his AGI is now below $150K (MFJ), looks like all of his suspended Sch E losses now have surfaced for a $62033 Sch E loss. WOOW

[Burke]

Interesting scenario, and I haven't dealt with just this particular situation. Somewhere in the back of my mind I was thinking you have to deal with the time it was personal property versus rental and prorate some things? And why would the sale price be "blank" on your worksheet? As far as the suspended losses, I believe that treatment in your software is correct, since it was a complete disposition. Would like to see a definitive answer on this treatment on the tax return. It's a great exam problem.

[AZ-Tax]

Here again w/little more detail & 2nd option on Rental disposed

Burke, I thank you for your reply. I would like to see others weigh in.

Here is it is again with a little more details and a 2nd option on the Rental Asset Worksheet.

1. My client bot his residence in 2006 for $539328
2. Converted his residence to a rental in 1/1/2009 (rental cost basis $350K fmv at time)
3. Took $26K rental depr over 2yrs 3mos,
4. Abandoned property end of March 2011.
5. Received 1099-A for 2011 on residence converted to rental property.
1099-A amts: $370375 “principal outstanding” Box 2.
$392731 “fmv” Box 4 & NOTpersonal liable.

Entered 1099-A data, in part 2 of “cancelled debt worksheet” #7 other real property #8 rental property & # 9 abandonment. Part 3 generated - $168953 on line G. In Bus, Farm & Rental smart worksheet I linked to TP’s Sch E.

Rental Asset Worksheet Option 1

In rental asset worksheet I disposed of rental property in March 2011 at a sales price of (left blank). A client since 2004 thus my software tracked the depr but TP’s AGI was too high in 09 & 10 to take any rental loss. $168953 of 4797 losses and since his AGI is now below $150K (MFJ), looks like all of his suspended Sch E losses now have been released for a $62033 Sch E loss.

Rental Asset Worksheet Option 2

Rather than leaving disposed sales price blank, I entered $392731 inclusive of land which is the fmv on 1099-A. Generated a form 4797 loss of $99828 on Ln 14 of form 1040. Once again, all suspended losses of $62033 are released. Ln G in Part 3 “computation of gain” on “Canceled Debt Worksheet” did not change and remained at $168953.

[Burke]

Hmmmm.....Wouldn't the cancelled debt amt ($370,375) be the amt realized or the sale price used in this instance? That is actually what the TP is getting out of this deal. Relief of the debt. See pub 4681, page 3. "The entire amt of the nonrecourse debt is treated as an amount realized on the disposition of the property." Gain is difference between nonrecourse debt and adj basis in property.

[Lion]

Has the debt been cancelled yet?

[AZ-Tax]

No 1099-C was issued and

No 1099-C was issued and according to the TP, the issuer of the 1099-A, will NOT be issuing one. This seems to be a strange transaction as to I think some 3rd party came in and offered an amt (very low amt) for my TP's former residence and the Bank accepted the offer.

[WhiteOleander]

1099A does not equate to canceled debt. It only show the repo sale. Debt may not be canceled yet.

[joanmcq]

Dave Fogel's site is down, but I'll try to do this from memory,

The basis for gain is different than the basis for loss in this situation. The 539,328 is irrelevant for computing the loss on a business property. Rental basis is $324,000 (350000-26000), sale price is the balance of the mortgage ($370,325), so it looks like you have a gain of $46325. This is balanced by the freeing up of the passive losses, which are triggered by a complete disposal in a taxable transaction.

Since the debt was nonrecourse, and the FMV was more than the balance on the loan, there shouldn't be any COD.

If you are trying to use the proseries worksheets for COD, etc, I've found them to be incredibly complicated and that it's easier to calculate this by hand.

[Burke]

The basis for gain is different than the basis for loss in this situation. The 539,328 is irrelevant for computing the loss on a business property. Rental basis is $324,000 (350000-26000), sale price is the balance of the mortgage ($370,325), so it looks like you have a gain of $46325. This is balanced by the freeing up of the passive losses, which are triggered by a complete disposal in a taxable transaction.

That was my gut feeling too. (That the gain on the rental should have been based on the rental basis and not the orig purchase price.) This makes much better sense.

[Burke]

1099A does not equate to canceled debt. It only show the repo sale. Debt may not be canceled yet.

Debt was nonrecouse. No 1099-C is likely in this case. And the 1099-A does not indicate a sale even took place. But it is treated as a disposition for the taxpayer. Had one of these this year, just did not involve a personal residence conversion.

[AZ-Tax]

To come up with these amts....

The basis for gain is different than the basis for loss in this situation. The 539,328 is irrelevant for computing the loss on a business property. Rental basis is $324,000 (350000-26000), sale price is the balance of the mortgage ($370,325), so it looks like you have a gain of $46325. This is balanced by the freeing up of the passive losses, which are triggered by a complete disposal in a taxable transaction.

Since the debt was nonrecourse, and the FMV was more than the balance on the loan, there shouldn't be any COD.

If you are trying to use the proseries worksheets for COD, etc, I've found them to be incredibly complicated and that it's easier to calculate this by hand.

Ok, I deleted the 1099-A form and the "cancellation of debt COD" worksheet. Then I entered $370325 as dispostion sales price. That generated $46719 form 4797 gain and then it reduced the suspended Sch E loss from $62033 to $46719 and I assume that was because his AGI is now way above the $150K phase out for rental loss. So now I need to re enter the 1099-A data etc.or shouldn't I? If I would have left the 1099-A and COD worksheet, it would really have thrown everything out of whack.

[joanmcq]

All of the suspended passive losses should have been freed up in a disposition, not part, unless the losses were generated by a different property.

So you should be able to take all of the losses associated with the property that was disposed of, and then any other rentals up to the amount of the income.

[AZ-Tax]

Your thoughts on how to handle the 1099-A?

All of the suspended passive losses should have been freed up in a disposition, not part, unless the losses were generated by a different property.

So you should be able to take all of the losses associated with the property that was disposed of, and then any other rentals up to the amount of the income.

Joan, my fault, I forgot to mention there is a 2nd rental property that was NOT yet disposed of. What does everyone think I should do with the 1099-A, should I just disregard it?

Thanks a bunch to all of you for contributing to this. This became one challanging tax return.

[KathMorgan]

1099a

I agree with Joan. Since the FMV (which is realistically what the bank either got for it or thinks they will get for it) is more then the outstanding loan there is no COD. But you have to use the outstanding loan as the sales price to figure the gain or loss on the disposition.
The second property is only a factor if the properties were linked in business (ie.. in a LLC or partnership or business entity) if the taxpayer is reporting these on his personal return on a Schedule E then each piece of proerty is a separate entity in itself so the disposition of this piece of property would be a "complete" disposition and allow the inclusion of the previous non-deductible losses attributed to that piece of property.
Wow! Was that a run on sentence or what!! Oh, and all of the above is assuming that he is not a real estate professional, lol
I had a client a few years ago who had purchased nine pieces of property during the boom to put in service as rentals. he was a military guy, so not a real estate professional. Some of the properties were recourse and some not. but all on separate Schedule E's. Of course, the market crashed and he lost all of the properties over the course of two years. It made for an interesting couple of years returns.

Kathy

[taxmom34]

i'm not sure about the treatment of this property as rental property. when he bought this house in 2006, he used it as personal residence 2006, 2007, 2008 and converted in 2009 and 2010 but not allowed to use depreciation. couldn't this property be considered principal residence? would you be considering rental because of a loss that wouldn't be allowed on personal? just curious.