IRS Form 1099-C CPA discusses the Qualified Real Property Business Debt exclusion of IRS Form 982, for Rental Property Short Sales and Foreclosures

Hi, I’m Gary Bode, an IRS Form 1099-C CPA. We can serve you through our virtual off regardless of your location. If you need a cancelled debt CPA and like what you read, call for a free consult to (910) 399-2705.

I’ll cover common issues for Form 1099-C, Cancellation of Debt, and Form 982, Reduction of Tax Attributes as it pertains to rental property short sales and rental property foreclosures. Mostly through the Qualified Real Property Business Debt exclusion of Form 982.

Form 1099-C, Cancellation of Debt, background and Form 982, Reduction of Tax Attributes Primer

Cancelled mortgage debt generally becomes taxable income on your personal or company’s income tax return. Unless you can exclude it through Form 982. But there are exceptions to the general rule, like cancellation intended as a gift. But, as a Form 1099-C CPA, I’ve never seen an exception. My guess is that exceptions never generate a Form 1099-C and that if you receive a From 1099-C, the amount in Box 2 is taxable. If you had a rental property short sale or rental property foreclosure you’ll have three or four issues eventually:

• Reporting rental property income or loss for the partial tax year up to the sell date. Use Schedule E, Supplemental Income and Loss, or Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation.
• Rental property short sales and foreclosures are “sales” and need to be reported on Form 4797, Sales of Business Property. You’ll get a Form 1099-A, Acquisition or Abandonment of Secured Property, first if the bank hasn’t cancelled the mortgage debt yet.
• Cancelled mortgage debt reported on Form 1099-C. Real Property Business Debt is one exclusion on Form 982.
• The tax attributes section of Form 982 requires reducing the basis of your other assets, if any. That means you’ll have more gain, or less loss, when you sell the affected asset. See the example below.

Rental property income and loss

In the tax year of the rental property short sale or rental property foreclosure, you need to generate Schedule E, Supplemental Income and Loss, or Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation, to report the final year’s rental income or loss to the IRS. Since Form 1099-A, Acquisition or Abandonment of Secured Property, and/or Form 1099-C, Cancellation of Debt, occur after financial problems, sometimes depreciation is the only expense in the final rental year.

The Sales Calculation for Gain or Loss

The tax reporting rules for the gain or loss the “sale” of your rental property include factoring in:

• Purchase price. I’d find the original HUD statement for the rental property purchase.
• Buyer’s expenses from the original HUD statement.
• Cost of improvements.
• Depreciation claimed on prior tax returns.
• Rental property losses you couldn’t claim on prior tax returns.
• Sale price. It’s not always what you sold it for - go figure.
• Seller’s expenses on the sales HUD.

Sometimes the tricky part is closing out rental property assets like appliances that weren’t part of the purchase.

I know it sounds straight forward but there’s plenty of IRS wrinkles to the calculation and then how much of calculated amount is taxable. Use Form 4797, Sales of Business Property, to report the gain or loss of the short sale or foreclosure.

Cancelled debt for rental property on Form 982, Reduction of Tax Attributes

Three exclusions apply to rental property cancelled mortgage debt:

• Real Property Business Debt. I know this sounds like a slam dunk. But you’re always able to exclude all the rental property cancelled debt through this exclusion.
• Insolvency, Folks call me the Insolvency CPA probably because insolvency is the best known aspect of Form 982.
• Bankruptcy.

The Qualified Real Property Business Debt exclusion, and or insolvency, isn’t always a free ride

Sometimes Form 982 just delays taxes. There’s some tax positioning possible if you have enough time to do so. So here’s an example of the tax attributes aspect of Form 982:

You have two rental properties.

• You short sell one rental property in 2013.
• The lender writes off the remaining rental property mortgage.
• You receive a Form 1099-C showing $100,000 in Box 2.
• That $200,000 immediately generates taxes due of $25,000 - $30,000 in 2013.
• So your Form 1099-C CPA manages to exclude all of the cancelled debt through Form 982. You’ve dodged a bullet a $25,000 - $30,000 tax bullet in 2013.
• Now the basis of the second rental property drops by that $100,000, so let’s say from $300,000 (the original purchase price) to $200,000. No big deal in 2013.
• When you sell rental property two for $290,00 in 2014 you’re maybe thinking I lost $10,000, $300,000 less $290,000.
• But you reduced the basis of rental property two to $200,000.
• Ouch, you’ve got a gain of $90,000, $290,000 sales less $200,000 adjusted basis.

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