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Discussion:QUALIFIED REAL PROPERTY BIZ DEBT

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Discussion Forum Index --> Advanced Tax Questions --> QUALIFIED REAL PROPERTY BIZ DEBT


Discussion Forum Index --> Tax Questions --> QUALIFIED REAL PROPERTY BIZ DEBT

Debbiecpa (talk|edits) said:

21 February 2014
I have a client who had 2 mortgages on residential rental property. Large one was forgiven in 2012 and no tax paid as was insolvent. 2nd mortgage forgiven in 2013. The 2013 1099-c reflects FMV at zero. (the 1099-c from 2012 reflected the fmv of condo that was sold). So had both debts been taken care of in 2012 there would have been no tax because the insolvency would have covered both debts. Don't understand how the property was sold in 2012 without the forgiveness on the 2nd property happening at the same time. Anyway, here I am in 2013 with debt forgiven on property that was sold in 2012. Trying to go with exception of qualified real property business debt code section 108, but the exclusion is limited to the excess of debt over fmv of biz property. There is no biz property because it was sold in 2013 and 1099-c agrees as it shows fmv at $0. So I am concluding that I can't go with this exception. Right???

Terry Oraha (talk|edits) said:

21 February 2014
right

Taxmonkey (talk|edits) said:

21 February 2014
QRPBI would probably not be ideal here, since it would lower the basis in rental property decreasing the loss or increasing any gain.

However if the taxpayer was insolvent in 2012 with 2 mortgages and a rental property, it seems they would likely still be insolvent with one mortgage canceled and the rental property sold.

Debbiecpa (talk|edits) said:

21 February 2014
You're right taxmonkey, they are insolvent but not for the total amount of the debt. You mention reducing the basis...2012 the property was sold and no tax on debt forgiveness because of insolvency. I showed a loss on sale of rental. Does the forgiveness of debt reduce basis in the rental property, thereby decreasing loss?

Ckenefick (talk|edits) said:

21 February 2014
Don't understand how the property was sold in 2012 without the forgiveness on the 2nd property happening at the same time.

Not sure if these were 2 different lenders or the same lender. Not sure if this was a foreclosure, short sale or what. But to answer your question, just because a property is disposed of in some fashion doesn't mean the lender has to forgive a recourse debt, unless there is some operation of law that makes it so. A lender could come back and sue on the deficiency.

Debbiecpa (talk|edits) said:

22 February 2014
It was 2 different lenders and it was a short sale. That makes sense now. The 1099c was checked that the person was personally liable, so it was recourse debt.

Thanks all for taking your time to help me. I really appreciate this site and you guys.

My last post...insolvency exception to being taxed on forgiveness: Does that reduce the basis in rental property, thereby decreasing loss? I thought this was only for the QRPBI exception.

Terry Oraha (talk|edits) said:

22 February 2014
insolvency exception to being taxed on forgiveness: Does that reduce the basis in rental property

An option to reduce the basis of depreciable property is available with insolvency similar to QRPBI. However, in your case with the associated property being gone before the cancellation of debt QRPBI is not available to you and insolvency is still available, but you can only consider reducing the basis of property the taxpayer still has. With insolvency there are ordering rules for basis reduction.

Debbiecpa (talk|edits) said:

22 February 2014
ok great, I did it right in 2012. I forgave the debt for insolvency. And then calculated a loss on sale of rental, ignoring the forgiveness.

Ckenefick (talk|edits) said:

22 February 2014
I think what happened here is this: Guy had financial issues. BOTH lenders likely agreed to a short sale (which is one reason why short sales take so long). The 2nd Mortgage Holder was shown that he would get nothing, so the 2nd Mortgage Holder agreed to the deal. Prop is actually sold in 2012, via short sale, and there's a deficiency on the 1st Mortgage, which 1st Mortgage Holder agreed to forgive. 2nd Mortgage Holder still had a claim against the borrower as of 12/31/12 (recourse debt) despite the property having been sold in 2012. In 2013, after the property is gone, 2nd Mortgage Holder forgives the 2nd Mortgage.

Debbiecpa (talk|edits) said:

22 February 2014
exactly. So conclusion is he has to report income on the forgiven debt in 2013. It's a bummer that it wasn't forgiven in 2012 because he would have been taxed on less forgiveness because his insolvency was higher then.

Regarding the 2012 transaction...I was right in not reducing his loss on sale of rental by the debt forgiveness, right?

Ckenefick (talk|edits) said:

22 February 2014
Right.

Debbiecpa (talk|edits) said:

22 February 2014
Most awesome, thanks everyone!

EZTAX (talk|edits) said:

22 February 2014
Reductions to tax attributes happen the following year. Did the loss get used up entirely? Did you elect to forgo carryback (hopefully not!)?

Debbiecpa (talk|edits) said:

22 February 2014
Loss got used up against W-2 income. Reduction of tax attributes...property gone, nothing to reduce.

Ckenefick (talk|edits) said:

22 February 2014
Taxpayer might have other attributes that require reduction.

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