Here's the scenario: Taxpayer bought a rental home for about $200k in 2009 and rented it through most of 2014. It was treated as rental income on Sch E, rent shown from a 1099 MISC property management company, depreciation taken. Meanwhile he declared bankruptcy in 2012 and, according to taxpayer, the rental home was included in the bankruptcy estate. (I haven't seen bankruptcy documents.) However, the financial institution holding the mortgage didn't do anything about taking back the property until 2014 when it was finally sold in a sheriff's sale for about $100k. So my client continued to rent it out, claimed rent as income and depreciated it. So he finally received a 1099-A for 2014 with FMV of about $100k, balance owed about $190k as I recall. So I have to report the "sale" on 2014 return, form 4797. I have purchase price about $200k, depreciation about $25k, sales price $100k and therefore loss of $75k. So my question...can he take the loss on form 4797? [No 1099-C but if it should arrive in 2015, I guess we would use a 982 with bankruptcy as reason and not have to pay taxes on COD income.] Somehow it just doesn't seem logical to me that he can take the loss...but doing all the math, that's what it comes out to be. What am I missing?
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Haven't looked it up, but intuition tells me that basis would need to be reduced by amount of forgiven debt. -
If the debt was discharged in bankruptcy, and it was taxable (i.e., a recourse loan), then the 982 should have been filed either with the bankruptcy estate return (if any) or the personal return in the year of bankruptcy. This indeed could have resulted in a basis adjustment applicable to the sale.Comment
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