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Insolvency CPA discusses Form 1099-C, Form 1099-A, Form 1099-S, Form 982, Form 8825, Form 4797 and Rental Property Short Sales

insolvency CPA and Form 1099-S

Gary Bode, CPA: tax complications just make the short sale experience worse. (910) 399-2705.

Insolvency CPAs deal with lots of short sales. Cancelled debt is a huge topic and I’ll only deal with short sales of investment or rental property in this post. If you received Form 1099-C for a short sale on your primary residence, you automatically qualify to exclude the cancelled debt from taxable income. This is simplest application of Form 982 and most folks handle it themselves. I’ll cover:

  • Basics of cancelled debt.
  • Form 1099-C. Cancelled Debt.
  • Form 1099-A.
  • Form 1099-S. Real estate sale.
  • Insolvency on Form 982.
  • Form 4797 to report the short sale.

Typical Sequence of Short Sales of Rental Property resulting in Cancelled Debt and Form 1099-C or Form 1099-A

  • You or your company sells a rental property for less than the remaining mortgage balance. Perhaps to avoid foreclosure.
  • Scenario A: The lender cancels the remaining balance of the loan. So, the amount of cancelled debt is the mortgage remaining balance less the short sale amount.
  • Scenario B: The lender issues Form 1099-A. It means you have report the short sale to the IRS and calculate Capital Gain/Loss.
  • Scenario C: You receive both Form 1099-C and Form 1099-A. If you exclude cancelled debt from taxable income using Form 982, it affects the basis of the short sold property. The taxable attributes section of Form 982 is tricky.
  • The broker for the short sale sends you and the IRS a Form 1099-S showing the short sale’s price and date. This overlaps Form 1099-A. But the IRS sometimes asks about the Form 1099-S if it isn’t specifically addressed in the tax return. Best to anticipate a Form 1099-S. Ask the borker about it if you don’t receive it.
  • The lender sends you and the IRS a Form 1099-C reporting the date and amount of cancelled debt.
  • Your insolvency CPA prepares the last Form 8825 for the partial rental year.
  • Your insolvency CPA excludes cancelled debt from Form 1099-C from taxable income using Form 982.
  • Your insolvency CPA calculates the capital gain or loss on the short sale. But using Form 982 and insolvency changes the basis of short sold property. This is the tax attributes part of Form 982 that causes so much confusion.

Can you deal with Form 1099-C, Form 1099-A, Form 1099-S, and Form 8825 Yourself?

Sure. If you get uncomfortable during self-preparation consider giving us a call. Form 982 is complex with large potential tax consequences. Our virtual office makes it easy to deal with us. We practice in all States except HI.

The Two Main Tax Issues

Cancelled Debt becomes Taxable Income: Exclusion via Insolvency using Form 982 with Form 1040 Form 1065, Form 1120-S or Form 1120

  • Form 982 is just another tax form included with the parent return; Form 1040, Form 1120, Form 1120-S, Form 1065.
  • The amount of cancelled debt on Form 1099-C becomes taxable income unless you can exclude it through Form 982.
  • IRS insolvency is one way a Form 982 CPA excludes the cancelled debt from taxable income.
  • Insolvency doesn’t mean bankruptcy. As always the IRS has a special definition; insolvency includes assets, liabilities and timelines.
  • The cancelled debt show up as income in the parent return and the Form 982 calculation gets deducted later in the parent return.
  • Short sales and Form 982 became a CPA specialty during the recession.
  • Insolvency is just one technique used on Form 982.

Capital Gain or Loss on the rental property short sale

  • With short sales involving Form 1099-A or Form 1099-C, the capital gain or loss  calculation appears on Form 4797.
  • Typical capital gain calculation when using Form 4797? Capital gain is a positive number: (amount shown on Form 1099-S) less (the original purchase price) plus (accumulated depreciation). Accumulated Depreciation traps some folks even though it seems they lost money on the short sale.
  • Here’s the tricky part of Form 982. The IRS adjusts the “tax attributes” of your remaining assets. This lowers the basis of the rental property therefore increasing the Capital Gain.

Our Virtual Office allows us to handle all the above issues, regardless of where you live or where the rental property is located.

I’m a rental property CPA that has rental property in my extended family. So I stay aware of emerging issues on Form 8825 and Schedule E . Read some of my Form 8825, Form 1099-C, Form 1099-A, Form 982 and/or cancelled debt posts to judge my experience for yourself. For a free phone consult please call (910) 399-2705.

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