Loss on reposession Rental RE

[mactoolsix]

Is rental property a business?

It's not clear whether rental real estate - particularly if reported on Sch. E - qualifies for the QRP business debt exclusion, since it's not a business.

Here's the best discussion on this subject by Dave Fogel, CPA

http://www.fogelcpa.com/Documents/FogelRentalForeclCSEA.pdf

I'll leave the conclusion to you . . .

Mike

[Gary2]

It's not clear whether rental real estate - particularly if reported on Sch. E - qualifies for the QRP business debt exclusion, since it's not a business.

[mactoolsix]

Sec. 108(a)(D) QRP

The recourse calculation

Mort Bal = 300,000
FMV = 200,000
CODI = 100,000

Sec. 108(a)(1)(D): Qualified Real Property Business Debt

If the taxpayer is not a C corporation and is not in bankruptcy or insolvent, the qualified real property (QRP) business debt exclusion may apply. QRP business debt does not include qualified farm indebtedness and is:

Incurred or assumed by the taxpayer in connection with real property used in a trade or business and is secured by such real property; and
Incurred or assumed before Jan. 1, 1993, or if on or after that date, is qualified acquisition indebtedness, which is incurred or assumed to acquire, construct, reconstruct, or substantially improve the property.

The amount of COD income that can be excluded under this exception is subject to the lesser of:

Fair market value (FMV) limitation: The excess of the principal amount of the outstanding debt over the FMV of the real property securing the debt; or
Overall limitation: The aggregate adjusted bases of all depreciable real property held by the taxpayer immediately before the discharge (other than property acquired in contemplation of discharge). When applying the overall limitation, the adjusted bases of the taxpayer’s depreciable real property must be determined after reductions in basis with respect to insolvency, bankruptcy, or discharge of qualified farm debt.

To exclude COD income from the discharge of QRP business debt, the taxpayer must make a timely filed election (including extensions) on a completed Form 982 for the tax year in which the discharge occurs. The amount of income excluded by a discharge of QRP business debt reduces the basis of the taxpayer’s depreciable real property as determined under Sec. 1017. The basis reduction is deemed to occur at the beginning of the tax year following the year of discharge.

Mike

[John3cpa]

Am i correct that there is recognized loss on a rental with cancelled debt where the adjusted basis is greater than the lessor of FMV or the amount of cancelled debt?
He did not have income from cancelled debt because the FMV was greater than the cancelled debt.