Loan Modifications & Reducing Tax Attributes for Insolvency

[peggysioux]

Taxpayer owns several pieces of properties used in business. Borrowed heavily against the properties in past years and now getting loan modifications and 1099-C's due to the modifications. The properties have dropped in value so much that taxpayer is insolvent. Not all properties have been modified yet (working on it.....what a mess!) Taxpayer did not discuss with anyone prior to the process and wasn't aware she would be receiving cancellation of debt on the modifications (it did say so in the paperwork). She is also not eligible for the qualified real property business debt exclusion being she did not file her 2012 tax return on time. So my question is this:

In researching the reduction of tax attributes, I found that the amount of the reduction of the basis of properties is limited to the excess of the aggregate of the taxpayer's adjusted basis of assets held immediately after the debt has been discharged over liabilities owed immediately after the discharge.

So, am I understanding correctly that if taxpayer's aggregate liabilities for taxpayers' real properties are more than the adjusted basis of those properties, there is no basis reduction??

[peggysioux]

Loan Modifications & Reducing Tax Attributes for Insolvency

Just bumping my question up hoping to get some feedback. I am hoping for some clarification of Reg. 1.1017.1(b)(3). When applying 1.1017.1(b)(3), would I only be looking at the properties that had 1099-C's applied or is it the aggregate of all properties owned by taxpayer. My interpretation is that it is the aggregate of all properties; however, it just doesn't seem accurate to me that being taxpayer refi'd many times and and has a large amount of equity debt would not have to lower the basis of property because her "aggregate property" liabilities is greater than her assets. Any input would be appreciated.

Peggy Sioux

[TaxGuyBill]

I've been looking at this for over an hour, and I THINK I have it figured out. This is REALLY not my area of expertise, but this is how I read it: You don't need to reduce your bases if you are insolvent AFTER the cancellation.

Insolvency is when your debts are greater than your assets BEFORE the cancellation. If you debts are STILL greater than your assets AFTER the cancellation, you DON'T need to reduce the bases.

I also agree that is it applies to ALL properties (and cash). That would include EVERYTHING, including all personal items (just like insolvency).


Again, I might be wrong, but that is what I think it means.

[peggysioux]

Loan Modifications & Reducing Tax Attributes for Insolvency

I found my answer in an article that Dave Fogel wrote; the article is an excellent article on reducing tax attributes due to canceled debt income exclusion. The amount of the reduction of basis is limited to the excess of the aggregate of the taxpayer's (1) adjusted bases of assets held immediately after the debt has been discharged, over (2) liabilities owed immediately after the discharge. The reduction of the basis of property is made under the rules of section 1017.

Peggy Sioux