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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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Rental Property Tax CPA explains using Form 982: Reduction of Tax Attributes Due to Discharge of Indebtedness, for Rental Property Short Sales | Cancelled Debt for S Corporations and Schedule E Landlords | Form 1099-A | Form 1099-C | Form 4797

Rental property tax CPA accountant explains Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, Form 1099-A, Acquisition or Abandonment of Secured Property, Form 1099-C, Cancellation of Debt and Form 4797, Sales of Business Property for rental property short sales.

If you’re having tax problems with rental property short sale consider calling us for a free phone consult at (910) 399-2705.

Rental property tax CPAs help Clients through the convoluted tax issues of rental property short sales. Rental property short sales may incur cancelled debt, which becomes taxable income unless you can exclude it through IRS tax Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. The usual progression includes:

  • Watching your rental property go under water; the Fair Market Value sinks below the mortgage balance.
  • Having cash flow problems. You’re not alone. Even in 2013 I’m seeing delayed fall out from the Recession.
  • Falling behind in mortgage payments such that the rental property is foreclosed or sold short.
  • Receiving IRS tax Form 1099-A, Acquisition or Abandonment of Secured Property.
  • Receiving IRS tax Form 1099-C, Cancellation of Debt.
  • Preparing the last Form 8825 or Schedule E.
  • Preparing Form 4797, Sales of Business Property.
  • Preparing IRS tax Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness.

Hi, I’m Gary Bode, a rental property CPA with a virtual office to serve you regardless of where you live. I’ll share some experience with the rental property short sale process and subsequent tax issues.

The last IRS tax Form 8825 or Schedule E

No surprises here, it’s just a partial year. Usually there’s an net operating loss. Note you still claim depreciation for the rental property in the last, partial year.

IRS tax Form 1099-A, Acquisition or Abandonment of Secured Property

Form 1099-A reports the transfer of the rental property to the bank. It shows when the title passed and an estimates the rental property’s FMV at the time of Form 1099-A issuance. You need to report this “sale” on your next landlord tax return. Sometimes I challenge the FMV on Form 1099-A if that works to the Client’s advantage. But the IRS assumes Form 1099-A is correct and you have to prove otherwise.

“Form 1099-A itself doesn’t establish cancelled debt on the rental property short sale. But there’s usually a Form 1099-C in your future. Sometimes years later. New rental property Clients call me because the IRS received a Form 1099-C and wants to know why it wasn’t on their tax return.”
– Gary Bode, rental property CPA

IRS tax Form 1099-C, Cancellation of Debt

When the bank actually cancels the mortgage debt they issue a Form 1099-C. Box 2 of Form 1099-C is the amount of debt cancelled. Sometimes Box 3 shows interest included in Box 2.

“Don’t pay any tax on cancelled debt shown on Form 1099-C until you exploit every exception available option on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness.”
– Gary Bode, rental property CPA

Form 982: Reduction of Tax Attributes Due to Discharge of Indebtedness

Usually your CPA excludes cancelled debt from Form 1099-C from taxable income through Form 982. Insolvency is the best known exception but there are others I use regularly. But excluding cancelled debt from taxable income sn’t a free ride with the IRS.  Now the tax attributes section of Form 982 comes into play. First the excluded cancelled debt reduces the year’s net operating loss. Next it reduces the basis of the short sold rental property, increasing the chance you have a taxable Gain on the sale.

Preparing Form 4797, Sales of Business Property

Issues that affect your Gain or Loss include:

  • What you paid for the property. I always ask for the HUD statement. Why? Landlords overlook buyer expenses.
  • How much Accumulated Depreciation you’ve claimed. It includes this year’s depreciation expense.
  • Past unclaimed rental property losses secondary to the passive loss requirements.
  • Selling price of the rental property. Remember to deduct seller expenses from the HUD statement.
  • You must further adjust the rental property’s basis by the remaining amount of cancelled debt excluded on Form 982.

How much is Form 1099-C going to cost me?

Any non-excluded cancelled debt is taxed. A rule of thumb? Figure 25-30%. So, $100,000 of un-excluded cancelled debt could incur $25,000 – $30,000 of federal and State taxes.

Do you need a rental property tax CPA for a short sale?

Maybe not. But there’s a lot of money at stake. Unlike IRS tax Form 1040, where the average taxpayer builds experience over the years, Form 982 is a new experience. If you get out of your comfort zone call us for a free consult at (910) 399-2705.

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2 comments to Rental Property Tax CPA explains using Form 982: Reduction of Tax Attributes Due to Discharge of Indebtedness, for Rental Property Short Sales | Cancelled Debt for S Corporations and Schedule E Landlords | Form 1099-A | Form 1099-C | Form 4797

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