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Gary Bode, CPA is a Master's Degreed, nation wide accountant offering tax and business services. Member of AICPA and NCACPA. Our virtual office provides excellent service to long distance and international clients. Call (910) 399-2705 for a free phone consult.

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I became totally and permanently disabled after a working for 44 years. I returned to college late in life (while working full-time) to fulfill my dream of becoming an RN and at that time found it necessary to secure student loans. Three years after being declared totally and permanently disabled my student loans were discharged. In January 2013 we received a 1099-C form declaring said student loans that were discharged however that amount could be considered as income for 2012. This was a large amount of money and we live on two pensions and social security income.

I started looking on the internet for information regarding 1099-C and felt that this was something that we could not handle alone. I made phone calls locally to a very reputable tax group in a city near us and they said it would cost $500 for an appointment and that they really prefer to do corporate taxes and they referred me to a local person who had worked for them at one time, we called and explained the situation and an appointment was made and then the comment was made that "I will have to do some research on this" and flags immediately went up and we called back and cancelled that appointment. I had been researching the IRSwebsite and every place else I could think of and I was not comfortable doing our own taxes this year. We called another local tax preparer that we had used in the past and made an appointment, however prior to the appointment, while still seeking information regarding our situation,

I came across a website for Gary l. Bode, MSA, CPA, PC in Wilmington, NC. I called Mr. Bodeand explained our situation and asked if he could help. He spoke very knowledgeably regarding the situation and stated that yes; he felt he could help us. As Mr. Bode was in North Carolina and we were in New York I scanned all of our documents including back-up documents for all of our claims and forwarded all to him. Mr. Bode kept in touch with us via email; we have spoken on the telephone several times and have become very comfortable with his knowledge and professionalism. Also, as I am a true "worrier" I have continued looking into information regarding our tax situation and I came upon another web page for Mr. Bode that included testimonials which spoke of his experience with this type of tax situation as it became prevalent during the recession. This reinforced in our minds that we had made the right decision in hiring this person as our tax preparer.

I share all of this as our taxes are now ready to be filed (we do owe tax for 2012 but not the astronomical figure we thought we were facing), and we are confident that they have been prepared with the utmost care by a gentleman who has an excellent working knowledge of the situation we faced and the tax laws that were applicable to said situation.

 

Bill and Carol

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Cancellation of Debt CPA discusses the Insolvency and Discharge of Qualified Real Property Business Indebtedness exclusion of Form 982 | Rental Real Estate Cancelled Debt

Form 982 CPA

I’m sorry you lost your rental real estate property. I’ll try to cover how to plan for cancelled debt on Form 1099-C and the gain or loss on Form 4797. For a free rental property cancelled debt consult call (910) 399-2705.

I’ll cover cancelled rental real estate debt using the insolvency and discharge of qualified real property business indebtedness exclusions of Form 982. Hi, I’m Gary Bode, a Form 982 CPA with a virtual office. I’m sorry you lost your rental property investment. If you like what you read, consider calling for a free consult on rental property cancelled debt. Tax reporting for the real property business indebtedness exclusion of Form 982 is highly individualized, especially with an S Corporation or Partnership. You can’t reasonably rely on this post for tax preparation advice.

“Sometimes the rental real estate property foreclosure or short sale generates a nice tax-deductible loss. Sort of a making lemonade out of lemons scenario.”
– Gary Bode, cancelled debt CPA

Typical Rental Property Cancelled Debt Logistics

  • The landlord runs into financial hardship and stops making mortgage payments:
    • The bank forecloses on the rental property.
    • The landlord is forced into a short sale of the rental property.
    • The landlord abandons the rental property.
    • Or, the landlord works out a deed in lieu of foreclosure arrangement with the bank.
  • Form 1099-A, Acquisition or Abandonment of Secured Property.
    • Sometimes the bank doesn’t issue Form 1099-A and instead immediately issues the notorious Form 1099-C, Cancellation of Debt.
    • A reports a title transfer to the bank triggering an IRS reportable “sale” of the rental real estate property resulting in a taxable gain or loss via Form 4797, Sales of Business Property.
    • Form 1099-A doesn’t generate rental property cancelled debt.
    • Generally a Form 1099-C gets issued eventually, but that could be in a future tax year.
  • Form 1099-C, Cancellation of Debt.
    • Again, the bank may skip issuing Form 1099-A and directly issue Form 1099-C.
    • Form 1099-C also triggers an IRS reportable sale of the rental property described above.
    • The amount of cancelled debt in Box 2 of Form 1099-C becomes taxable income.
  • The S Corporation, Partnership or individual prepares Form 982, generally using the insolvency and or qualified real property business indebtedness exclusion.

“Having your rental real estate property go south is bad enough. Don’t pay taxes on the cancelled debt without exploiting the insolvency and qualified real property business indebtedness exclusions of Form 982.”
– Gary Bode, cancelled debt CPA

The Tax Reporting Logistics of Rental Property Cancelled Debt

  • Partial year preparation of:
    • Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation.
    • Schedule E, Supplemental Income and Loss.
  • Calculation of gain or loss on Form 4797, Sales of Business Property.
    • Both Form 1099-A and Form 1099-C have a Fair Market Value listed for the rental property at the time of deed transfer.
    • The IRS assumes Form 1099-A and/or Form 1099-C is accurate.
    • Sometimes I  show there’s a better number for the rental property FMV.
    • Rental property cancelled debt tax returns often include additional documentation and explanations.
    • I’ve seen landlords shocked when their loss is less than what they expected, or worse yet, turns into a gain. Form 4797 requires more than just the applicable sales price and original purchase price.
      • The most common example is the recaptured depreciation part of Form 4797.
  • Preparation of Form 982 – exclusion of cancelled rental property debt from taxable income.
    • The amount in Box 2 of Form 1099-C, Cancellation of Debt, becomes taxable income unless the landlord can exclude some or all of it through Form 982.
    • Landlords may use both the insolvency and qualified real property business indebtedness exclusion of Form 982.
    • Both the insolvency and qualified real property business indebtedness exclusion of Form 982 have IRS tax reporting rules.
  • Preparation of the Reduction of Tax Attributes section of Form 982. I’ve found an example communicates the main aspect this IRS concept best. But few things are straight forward in rental property cancelled debt.
    • Let’s say you have two rental properties. One got foreclosed in 2013 and you received a Form 1099-C.
    • You managed to exclude $100,000 of cancelled debt through the insolvency and /or qualified real property business indebtedness exclusion of Form 982.
    • You decrease the basis (purchase price) of the remaining rental estate property by $100,000 on 2013’s Form 982 as required by the IRS.
    • You sell the remaining rental real estate property in 2014.
    • The 2014 sale generates $100,000 less loss or $100,000 more gain because of the 2013 Reduction of Tax Attributes.
    • Sometimes you can plan to minimize this tricky part of rental property cancelled debt. But that takes time and experience.
    • Moral of the Reduction of Tax Attributes story? Exclusion of rental property cancelled debt often just delays paying the tax until you sell another asset.

Sources of help with Form 982 and the rental property cancelled debt tax reporting process

  • Individuals – Schedule E and Form 1040 filers.
    • The Form 982 instructions.
    • Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments).
    • Note the Form 1099-C, Cancellation of Debt, instructions are for the bank not the taxpayer.
  • S Corporation and Partnerships – Form 8825 and Form 1120-S/1065 filers.
    • The Form 982 instructions.
    • The underlying IRS regulations.

Rental property CPAs have access to specialized tax services where the relevant insolvency and qualified real property business indebtedness exclusion issues are laid out logically. Sometimes anyway. The average landlord can’t afford these services and would be hard pressed to understand them without a strong tax preparation background – sorry. But your local university might subscribe to some tax database you could use.

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7 comments to Cancellation of Debt CPA discusses the Insolvency and Discharge of Qualified Real Property Business Indebtedness exclusion of Form 982 | Rental Real Estate Cancelled Debt

  • Andrew Hall

    I figured that all my cancelled debt will not be taxable because I was insolvent prior to the discharge date. My question is if i file a 982 and have no other income to report do I still have to file a 1040 or just the form 982. Also can the 982 be e-filed?

    • Hi Andrew: I recommend filing a complete return to show the IRS you dealt with the Form 1099-C, Cancellation of Debt. You don’t just file Form 982, Reduction of Tax Attributes, by itself. I know the IRS tax reporting rules on cancelled debt often means jumping through some hoops just to end up with a $0 of additional tax due. But that’s the way it is. Hope that helped.

  • Lucila Molina

    I was forced in to a short sale of a rental property in 2014. It sold in July of 2014 but I had not had a tenant in the condo since October of 2013. I have another rental property that was rented for the full 2014 year and I own my principal residence. Can I use form 982 and use the “discharge of qualified real property business indebtedness, line 1d” and then reduce the basis in my other rental property, line 4?

    Thank you,

    Lucy

  • Paul

    Hi Gary

    Can you use both insolvency AND the qualified real property business indebtedness exclusion together on Form 982 to try and eliminate / reduce the tax burden from cancelled debt?

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