Discussion:Debt Forgiveness/Related Loss

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Discussion Forum Index --> Tax Questions --> Debt Forgiveness/Related Loss

SirRob (talk|edits) said:

17 March 2006
Client rec'd 1099-C (Misc Income - Debt Forgiveness) dated 1/6/05 in amount of $15K related to loan for 1989 purchase of investment property, which was repossessed in 1991 (14 years ago). Purchase price of $21,000 w/ approx $2,700 principle paid prior to repo. Taxpayer has $15K of income to report in 2005. Anyone aware of any possible offsetting loss of any kind available?

Taxpayer has real/economic loss of the $2700 and now has to report 15K of income never seen or realized?

Dennis (talk|edits) said:

17 March 2006
All depends on what was reported 1989 through 1991. Sounds like a 1991 disposition with balance of debt as sales price.

SirRob (talk|edits) said:

17 March 2006
Nothing done/reported in any prior years - was just forgotten/written off as bad experience

SirRob (talk|edits) said:

17 March 2006
Also, client lost property and had nothing to sell?

Dennis (talk|edits) said:

17 March 2006
You need to supply a lot more information.

SirRob (talk|edits) said:

17 March 2006
Taxpayer bought Real Estate in Indiana as investment for $21K in 1989

Paid approx $2738 principle on loan thru 1991. Bank repossessed in 1991. Taxpayer, now in Washington, was notified bank sold property for approx $2400 in 1995 Taxpayer rec'd 1099-C in 2006 for 1/6/05 debt cancellation of $15,862 ($21000 - $2738 - $2400?) All info is approx from memory, except for 1099-C as taxpayer dismissed as bad business deal 10-15 years ago.

Riley2 (talk|edits) said:

17 March 2006
Taxpayer should have reported a sale of land for $2,400 with a basis of $21,000 in 1991. The debt cancellation income of $15,862 should be reported in the year in which the debt was rendered uncollectible because of the statute of collections on debt enforcement in your state.

Dennis (talk|edits) said:

17 March 2006
OK. I don't know how your client managed to buy the property with 100% financing or what happened to the property to cause such a drastic decrease in value, but he does have to recognize income.

You might try taking the position that the property was worth more than the debt when he signed it over to the bank in 1991, or at least more than the eventual selling price. Not his fault the bank let it rot for four years. Schedule your explanation as a line 21 attachment.

Dennis (talk|edits) said:

18 March 2006
Apparently Riley and I were posting at the same time. I think he's right except for sale price (which is meaningless, but I vote for fmv on date of transfer).

Riley2 (talk|edits) said:

18 March 2006
In a foreclosure sale, fair market value of the property is not really relevant. The sales price fixes the amount realized. However, in a deed in lieu of foreclosure, the fmv becomes very relevant.

SirRob (talk|edits) said:

18 March 2006
Since 1991 is past history, and client didn't receive 1099-C until 2005, it sounds as though taxpayer has no options but to report 15K of income which he has never seen or received benefit from?

Dennis (talk|edits) said:

18 March 2006
Your only complaint is the difference between sales price in 1995 and event in 1991. If your client just walked away and made no effort to sign over the deed to the bank he did it all to himself.

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