Discussion:Debt cancellation on foreclosure of rental

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Advanced Tax Questions --> Debt cancellation on foreclosure of rental


Discussion Forum Index --> Tax Questions --> Debt cancellation on foreclosure of rental

Brian99j (talk|edits) said:

17 March 2012
Does anyone know if cancelled equity debt (rather than original acquisition debt) on a foreclosed rental can be excluded from income due to insolvency with the required Form 982 reduction in basis at the beginning of next year applied to the taxpayer's principal residence?

Ckenefick (talk|edits) said:

17 March 2012
Yes, lots of people know.

Trillium (talk|edits) said:

17 March 2012
Welcome to the March 17 "foreclosure day" event. Outside of this site, everybody seems to be wearing green today, but here every second question is about foreclosures, so red is the color of the day. In other words, there may be a bit more demand than supply for responses.

Recommend that you check the info on the foreclosures/debt cancellation/reduction of attributes category page to see what info may already be available on the site.

MP-JD-LLM (talk|edits) said:

17 March 2012
LOL

Brian99j (talk|edits) said:

17 March 2012
Just seems to good to be true in that a taxpayer could then turn around and in the next year exclude the gain on their principal residence due to S121.

Trillium (talk|edits) said:

17 March 2012
Try this search: insolvency 982 121.

Wiles (talk|edits) said:

17 March 2012
Brian99j, I believe you are mixing apples w/ oranges. Why would you be reducing the basis on a personal asset like a residence due to COD on business property?

Brian99j (talk|edits) said:

17 March 2012
The debt was not used on the rental and the insolvency exclusion requires reducing basis attributes at the beginning of the year following the cancellation. Let's say the taxpayer owner a 2nd rental and a home in the following year - can the reduction be allocated to both assets, and if so, what method is used to determine the allocation?

I did read in the link above that in a bankruptcy the reduction in basis of the principal residence is treated as S1245 depreciation so I will look for authoritave source on that.

Incognito (talk|edits) said:

18 March 2012
Yes, I see your point. The list of potential basis reduction opportunities are endless. What if they were using their vehicle 80% of the time to go to Home Depot and make inspection trips on their rental? Or using a home office to manage their rentals, worse if a detached structure? What about laptops, software, cell phone? Thank goodness we don't have to consider their intangible assets such as their rental know-how and tenant list. OR DO WE???

Ckenefick (talk|edits) said:

18 March 2012
Thank goodness we don't have to consider their intangible assets such as their rental know-how and tenant list. OR DO WE???

...and what would the basis be in these intangibles?

DaveFogel (talk|edits) said:

18 March 2012
There's a strict set of ordering rules for the reduction of basis. See Reg. 1.1017-1(a). I discuss these rules briefly in my article “Reducing Tax Attributes Due to Canceled Debt Income Exclusion”.

Brian99j (talk|edits) said:

24 March 2012
Are you required to attach a statement to the return reporting the basis reductions?

DaveFogel (talk|edits) said:

24 March 2012
Yes. Line 10a of Form 982. To answer your other question, which was the authoritative source that treats the basis reduction as IRC §1245 depreciation, see IRC §1017(d).

Brian99j (talk|edits) said:

24 March 2012
Besides line 10a though are you required to specifically to show, in a supplemental statement for instance, which assets will have their basis reduced on the first day one of the following year? Thanks for your responses.

DaveFogel (talk|edits) said:

24 March 2012
Yes. Read the instructions to Form 982:

"You must attach a statement describing the transactions that resulted in the reduction in basis under section 1017 and identifying the property for which you reduced the basis."

Brian99j (talk|edits) said:

25 March 2012
I'm suprised that the taxpayer is not required to reduce their passive activity losses and/or PAL carryforwards. In the case I am looking at the COD income is excluded while the PALS attached to the property short sold are freed up. The remining rental will have it's basis reduced so when sold in 2012 the befitis will reverse to a good degree but it has passive activity losses attached to it as well.

Brian99j (talk|edits) said:

29 March 2012
Is there any flexibility with the "Insolvency" exclusion that allows you to apply some of the basis reduction in the year the debt was cancelled. Let's say for example some of the debt cancelled was used to improve a property that was short sold so there is a theoretical justification.

DaveFogel (talk|edits) said:

29 March 2012
You can make the election under Sec. 108(b)(5) and Reg. 1.108-4 to reduce the basis of depreciable property ahead of the other tax attributes, but the reduction of basis of the depreciable property is still made on the first day of the year following the year in which the debt is discharged.

To join in on this discussion, you must first log in.
Personal tools