Short Sale on a Rental Property ...PLEASE HELP!

[nwtaxlady]

client did a Short Sale on a Rental Property. Here are the Facts.

Purchase cost $95,306
less deprec $14,272
adjusted basis = $81,034

Had a 1st on it with acquisition debt of $95,306 and a 1099-C on this one for $4688 and in short sale paid off $90,617 on this loan.
Short Sale closing statement sold for $108,000 but this 1099-C says in box 7 FMV $101,830

Had a 2nd mortgage on it that was all EQUITY INDEBTNESS (not used on the house). This one principal paid on this loan was only $6000 and a 1099-C was issued for $19,875.

Other key facts. Both are recourse loans. Taxpayer IS insolvent of $17,000. The taxpayer has 2 other personal use homes.

PLEASE HELP.

[appelman]

What is the question?

For recourse loans, the sale price is generally the lesser of FMV or total loan balance. The 1099-C FMV may include selling costs, which seller will add to basis. But in any case, it looks as though he is going to have a gain on the sale, plus some unexcluded debt relief.

[AZUKHiker]

If it is a short sale then the actual proceeds are used. Ignore what is in Box 7 of the 1099-C. That box is only relevant to a foreclosure.
So as appelman points out, you have three transactions. The disposal of the property which will show 1250 unrecaptured gain and also an actual gain as the proceeds exceed the original basis (however look at the HUD1 to pick up all the closing costs). The second and third transactions are the COD from the 1099Cs which appear to show that there is not enough insolvency to completely eliminate the COD, so there will also be some COD income.