Rental Property Sold_1099C

[bats]

I have a taxpayer who transitioned their primary residence to rental property in 2014. The original sales price of the property was 122,000 in 2004.
At the time of conversion, the FMV was 54,000. In 2015 the taxpayer purchased another home that became the primary residence.

In 2016 the rental property was sold on a short sale for 75,000. A 1099C was issued indicating the debt is recourse debt and the amount cancelled was 31,083.00

How do I report the sale of rental property? Do I use 75,000 as the sales price on the 4797? This creates a taxable capital gain on the rental. Is this correct?

I can show insolvency at the time of the short sale...the property is also qualified real property business indebtedness...Does the insolvency exclusion apply only to the principal residence? I don't believe it does but would like confirmation.

Any help, feedback or suggestions would be greatly appreciated.

[TaxGuyBill]

Insolvency applies to everything.


For a recourse loan, sale price is the smaller of (1) the mortgage amount or the (2) the FMV.

https://apps.irs.gov/app/vita/content/36/36_03_070.jsp?level=advanced

Using your numbers, there is NO gain or loss on the 'sale'/foreclosure of the property. When the sale price less than the Adjusted Cost Basis ($122,000, plus improvements, minus depreciation) but more than the Adjusted FMV Basis ($54,000, plus improvements after rental conversion, minus depreciation), there is no gain or loss.
In your case, the $31,083 of excluded debt would reduce the basis. However, it seems like you would still probably have no gain or loss.

To report this type of sale with a $0 gain/loss in the software, you may need to 'make up' a fake basis to report a $0 gain/loss. You take (1) the sales price, (2) plus depreciation, and put that in the software for the basis. With that ‘fake’ basis, the software will subtract the depreciation to arrive at the Adjusted Basis, which would be the same as the selling price. The result is a $0 gain/loss.

[Kram BergGold]

I think you put the Cart Before the Horse

It seems to me, that the taxpayer used the house as a primary residence for at least two years out of the five years before the sale. If so, taxpayer sold the primary residence and not a rental property.

[TaxGuyBill]

It seems to me, that the taxpayer used the house as a primary residence for at least two years out of the five years before the sale. If so, taxpayer sold the primary residence and not a rental property.

If it was a rental property in the year of the sale, it is reported as a sale of rental property on Form 4797.

[taxmom34]

I agree with Kram BerGold, it was sale of personal residence because of time.

[TaxGuyBill]

I agree with Kram BerGold, it was sale of personal residence because of time.

Although it qualifies for the §121 exclusion, it is still the sale of a Rental Property on Form 4797.

The Instructions for Form 4797 even tell how to report it when it qualifies for the §121 exclusion.

https://www.irs.gov/instructions/i4797/ch01.html#d0e398

[bats]

Thank you all for your comments.

As far as the rental home vs. primary. In 2015 the taxpayer purchased another home... the ability to use 2 of 5 years as a factor when determining what type of property it is no longer exists...I've read you can't have two primary residences if I'm not mistaken.

Perfect, Insolvency works for all. The taxpayer was insolvent when factoring in all student loans. Additionally, QRPBI also applies.
I'll work with the software to adjust the basis. I'm using Drake and the basis is flowing from the 4562, which has the 54,000 at the time of conversion.

I do have another question... on the 1099C I have to choose a form to point the information at... if I point the 1099C to the 982 the income is excluded, which is correct based on Insolvency and QRPBI. If I point the 1099C to the schedule E it shows up as rental income. Can anyone confirm that pointing it to the 982 is the correct way to handle this in the software?

Again, thanks for the comments. It means a great deal to know the forum works!

[TaxGuyBill]

Actually, the house WOULD still qualify for the 2/5 year exclusion, BUT there isn't a gain, so that doesn't matter in your situation. It doesn't need to be the most recent Primary Residence, it just needs to be a Primary Residence for at least 2 year, out of the last 5 years, and it doesn't matter if they have a new Primary Resident. But again, in your situation it doesn't appear to be a gain, so you don't need to worry about that in this situation.

It needs to be connected with 982. Maybe your software can connect it to Schedule E and then that connects to 982 (but it probably doesn't), but as long as it connects to 982, you should be fine.

[bats]

Thank you again!