Short Sales, 982 and NOL to take

[rkhan71]

Hello all,

Need some second to third thoughts about the following:

TY 2009 Qualified Business Rental Property Lost to Short Sale / FC, created NOL, and did the Form 982 situation for tax attributes. Same thing happened in TY 2011, second property similar NOL / Form 982. Can we take some of the NOL in carry-forward years (had elected to do so at time of filing) because of form 982 / tax attribute confusion? Not all of the "tax attribute" for NOL would have been used up. I want to use some of the NOL that was carried forward against current income situation. But another colleague said that Form 982 negates use of NOL carry-forward. I am confused because not all of NOL was necessarily taken on the QBRP situation. But...

Thanks always for your help and considerate comments.

rkhan

[Bees Knees]

Form 982 instructions say:

Use Part I of Form 982 to indicate why any amount received from the discharge of indebtedness should be excluded
from gross income and the amount excluded.
Use Part II to report your reduction of tax attributes. The reduction must be made in the following order unless you
check the box on line 1d for qualified real property business indebtedness or make the election on line 5 to reduce
basis of depreciable property first.
1. Any net operating loss (NOL) for the tax year of the discharge (and any NOL carryover to that year) (dollar for
dollar);
2. Any general business credit carryover to or from the tax year of the discharge (331/3 cents per dollar);
3. Any minimum tax credit as of the beginning of the tax year immediately after the tax year of the discharge (331/3
cents per dollar);
4. Any net capital loss for the tax year of the discharge (and any capital loss carryover to that tax year) (dollar for
dollar);
5. The basis of property (dollar for dollar);
6. Any passive activity loss (dollar for dollar) and credit (331/3 cents per dollar) carryovers from the tax year of the
discharge; and
7. Any foreign tax credit carryover to or from the tax year of the discharge (331/3 cents per dollar).
Use Part III to exclude from gross income under section 1081(b) any amounts of income attributable to the transfer
of property described in that section.

The purpose of Form 982 is to reduce tax attributes when debt discharged is excluded from income under one of the code sections that allows for an exclusion.

In your case, you have the discharge of debt from qualified real property business indebtedness, which is excludable under the code. Since you don’t have to pay tax on that discharge of debt, you have to reduce dollar for dollar your NOL carryforward (which is first on the list above). Thus for example, if debt discharged that was excluded from income equals $30,000, and the sale of that property produced a $25,000 NOL, all of the NOL is lost (with the remaining $5,000 reducing the next tax attribute on the list, and so on). If the debt discharged was $25,000 and the sale produced a $30,000 NOL, then $5,000 of the NOL would still be available for carryover to the following year. That is what is meant by reducing tax attributes dollar for dollar by the amount of debt discharged excluded from income.

You also have the option, according to the Form 982 instructions to elect to reduce basis in the property dollar for dollar before reducing the NOL. However, I would assume that if the basis in the property is reduced dollar for dollar by the debt discharged, that would in effect reduce your NOL due to the sale of the property dollar for dollar by the same amount, which would seem to produce the same net results.

Bottom line is, I agree with you. If your total NOL exceeds the amount of debt discharged that is excluded from income, then the excess amount of NOL is available for carry forward to the following year.