HELP- Insolvent Foreclosure-Rental

[Sabre]

After reading all the posts and researching pub 4681, IRC 108, Parker Tax and rereading Dave Fogels posts and articles i am trying to finalize a tax return for an Insolvent TP who foreclosed on rental real estate in 2011.

I understand that the debt foregiveness is not shown as ordinary income on the return and the depreciable basis is not reduced for this debt foregiveness.

Question- Does my client get to take the passive loss carryforward on his 2011 tax return.

Your help on this is greatly appreciated.

[appelman]

Au contraire!

If the debt relief was shown on a 1099-C, it would be best to enter it on Line 21, with an offset referring to Form 982. And if you work your way through Part II of Form 982, you will see that Line 10 involves reduction of bases, while Line 12 involves reduction of passive activity loss carryovers.

[Gary2]

For the insolvency exclusion, you calculate the current year tax before reducing any attributes. So yes, the passive losses can be taken in 2011 if otherwise eligible.

[appelman]

Maybe I misunderstood.

I assumed, perhaps incorrectly, that Sabre was asking whether he could continue to carry forward his suspended passive losses that are shown on his 2011 return. Gary is right that passive losses can be utilized in 2011. In particular, since the rental property was disposed of, all of its suspended passive losses are liberated. If there are other suspended passive losses, they can be liberated to the extent of passive income. (I believe that debt relief income on rental property is passive.) Any suspended passive losses remaining at year-end must be applied against any of the debt relief exclusion that remains after reducing other tax attributes.