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Discussion:1099-A Two Years after Bankruptcy

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Discussion Forum Index --> Basic Tax Questions --> 1099-A Two Years after Bankruptcy


Discussion Forum Index --> Tax Questions --> 1099-A Two Years after Bankruptcy

FLAcct (talk|edits) said:

24 March 2014
My client filed bankruptcy in 2011 and it was discharged the same year. Included in the bankruptcy were several rental properties. I calculated COD income using the FMV and mortgage balances in the discharge paperwork, reduced tax attributes appropriately and reported this on the 2011 Form 982. Now two years later my client has received a 1099-A for two of the rental properties. I know that the FMV less the reduced basis of the rental properties has to be reported as income on the 2013 tax return. Because the 1099-A is two years after the bankruptcy and the real estate market has improved during that time, the FMV on both of the 1099-A is quite a bit higher than the FMV at the time of bankruptcy. It seems that I should be able to use the FMV of the property at the time of bankruptcy since that is when my client abandoned the property. Is this correct? (BTW, I have read countless threads on this subject, but am still unclear about this one question.)

DaveFogel (talk|edits) said:

24 March 2014
For debt secured by real estate, the bankruptcy discharge applies only to the portion of the debt that exceeds the fair market value of the property. See Letter Ruling 8918016 (discussing 11 U.S.C. §506). As a result, the bankruptcy discharge cancels only the portion of the secured debt that exceeds the fair market value of the property (i.e., the unsecured portion). The unsecured portion of the debt is considered to be canceled on the date that the court grants the bankruptcy discharge. The secured portion of the debt that survives the bankruptcy is treated as a nonrecourse loan. See Letter Ruling 8918016.

So, as I see it, since the debt is nonrecourse, pursuant to Commissioner v. Tufts, 461 U.S. 300 (1983); Treas. Reg. §1.1001-2(a)(1); Example (7) at Treas. Reg. §1.1001-2(c); L&C Springs Associates et al. v. Commissioner, 188 F.3d 866 (7th Cir. 1999); and Rev. Rul. 76-111, 1976-1 C.B. 214, a foreclosure that occurs 2 years later results in gain or loss equal to the secured portion of the debt that survived the bankruptcy (FMV on the date of the bankruptcy discharge), minus adjusted basis.

I'm aware that there are some who believe that the entire debt survives the bankruptcy because it was secured. But the IRS, in Letter Ruling 8918016, says no.

FLAcct (talk|edits) said:

24 March 2014
Thanks Dave!

EZTAX (talk|edits) said:

25 March 2014
Dave it is so nice to have you back! Always greatly appreciate your insight. Hope you can find a way to not get burned out by it all this time (If that is the reason for your break.)

CathysTaxes (talk|edits) said:

25 March 2014
Welcome back, Dave.

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