Discussion:1099A Loss calculation

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Discussion Forum Index --> Basic Tax Questions --> 1099A Loss calculation

Discussion Forum Index --> Tax Questions --> 1099A Loss calculation

Birdman (talk|edits) said:

15 February 2010
Client owned a rental property that was foreclosed in 2009 and received a 1099A. It's marked personally liable. The debt was $500,000, the FMV was 300,000. His basis was also 500,000 (let's ignore depreication for now). He is insolvent by at least the 200k COD.

So here are my conclusions. Please let me know if I'm right. It seems too good to be true for the client because his taxable loss has no economic basis.

1) Insolvent, so there is no COD income. I basically file 982 and I will reduce basis in whatever propery he has on 1/1/2010. He doesn't have much else, so no downside for him.

2) He reports a loss on 4797 of $200,000 (FMV - Basis) His basis is not reduced by the COD because that reduction applies to property owned at 1/1/2010.

I've spent a lot of time on this, and it just doesn't make sense that he can get the $200 loss when he hasn't put up a dime of his own money. Sure his tax attributes would be reduced, but he doesn't have any! It makes more sense to reduce the loss by the COD, but I understand that the reduction of attributes applies to property owned at 1/1/10.

Thanks for your help.

EZTAX (talk|edits) said:

15 February 2010
I am pretty sure the COD cancels out the loss. Others will chime in. Now if the 1099a is issued in 2009 and the debt is not cancelled until 2010 I believe you would get the loss with no reduction.

DaveFogel (talk|edits) said:

15 February 2010
Birdman, your analysis is correct. When the insolvency exclusion is used, IRC §108(b)(1) provides that the tax attributes of the taxpayer are reduced in the order listed in IRC §108(b)(2). If the only tax attribute to reduce is basis of property, then IRC §108(b)(2)(E) says go to IRC §1017. IRC §1017(a) states that the basis is reduced at the beginning of the year after the year in which the debt is discharged, which in your case would be 1/1/2010.

The intent of IRC §108 is to defer the income by reducing other tax attributes, including the basis of property. Are you SURE that you have counted all of the taxpayer's assets? A lot of people miss the fact that you have to include retirement accounts and the present value of pensions and annuities.

Birdman (talk|edits) said:

16 February 2010
Thanks Dave, I'm glad you replied. I've read your other posts on this subject.

I'll double check the assets on his scheduel he made and use the worksheet in the pub.

I just thought of another thing. This 4797 loss will create an NOL. So, this would be the 1st attribute to be reduced, not the basis in his other property at 1/1. It looks like 108(b)(2)(A) says to reduce the NOL, so he can't carry it forward or back. Am I correct on these points?

EZTAX (talk|edits) said:

16 February 2010
Dave - I find it hard to disagree with you because you have shown such expertise in this area but...

According to the 982 instructions:

"Applied to reduce any net capital loss for the tax year of the discharge including any capital loss carryovers to the tax year of the discharge"

I understood this to mean that the 200k loss gets reduce by the COD income in the current year.

DaveFogel (talk|edits) said:

16 February 2010
EZTAX, the $200,000 loss is not a capital loss because the property was a rental. It's an ordinary loss under IRC §1231.

Birdman, my understanding of two sections in IRC §108 are that the taxpayer can use the $200,000 loss in calculating the tax for 2009, but must reduce any remaining loss after calculating the tax to find out whether there is an NOL to be carried back or forward to any other years. The two sections are IRC §§108(b)(4)(A) and (B):

(A) REDUCTIONS MADE AFTER DETERMINATION OF TAX FOR YEAR.—The reductions described in paragraph (2) shall be made after the determination of the tax imposed by this chapter for the taxable year of the discharge.
(B) REDUCTIONS UNDER SUBPARAGRAPH (A) OR (D) OF PARAGRAPH (2).—The reductions described in subparagraph (A) or (D) of paragraph (2) [NOLs or capital loss carryovers] (as the case may be) shall be made first in the loss for the taxable year of the discharge and then in the carryovers to such taxable year in the order of the taxable years from which each such carryover arose.

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