We try to make lemonade from lemons using Form 982. For a free phone consult on rental property and/or cancelled debt call (910) 399-2705.
Hi, I’m a rental property CPA with a virtual office to serve long distance clients. My extended family owns rental property, so I keep up with current issues on rental property. Unfortunately that includes cancelled debt. This post answers most questions I get on rental property foreclosures and short sales.
Cancelled Debt from rental property foreclosure or short sale affects:
- Schedule E, Supplemental Income and Loss.
- Form 8825 Rental Real Estate Income and Expenses of a Partnership or an S Corporation.
- Form 1099-C, Cancellation of Debt.
- Form 1099-A, Acquisition or Abandonment of Secured Property.
- IRS tax Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).
- IRS tax Form 4797, Sales of Business Property.
- Form 1099-S, Proceeds From Real Estate Transactions
It’s not just homeowners that were hit by the economy, foreclosures and short caught landlords, too. Here’s the typical flow of events.
- You can’t pay the rental property mortgage.
- You’re forced into a rental property short sale or foreclosure. I’m not dealing with a re-finance in this post, sorry.
- The bank takes possession of the rental property. This triggers a Form 1099-A. But sometimes, if they simultaneously cancel the debt, the bank just sends Form 1099-C. We’ve seen a few instances where the bank sends Form 1099-A and Form 1099-C in a single document.
- Rental property foreclosure is a “sale” to the IRS. Both foreclosures and short sales require calculation of gain or loss on sale through IRS tax Form 4797, Sales of Business Property.
- The bank writes off the rental property mortgage balance.
- The amount your bank “forgives” is cancelled debt.
- The bank reports the cancelled debt to both you and the IRS via Form 1099-C, Cancellation of Debt.
- The amount on Form 1099-C becomes rental income on Schedule E or Form 8825. Note it doesn’t hit line 7 of Form 1040 as Other Income (like some cancelled debt does).
- Rental property profit or loss from Schedule E flows into Line 17 of Form 1040.
- Use Form 982 to exclude some of the cancelled debt from taxable income.
- Present your exclusion on Line 21 of Form 1040.
“Don’t pay tax on rental property foreclosures or short sales until you exhaust every possibility to exclude cancelled from becoming taxable rent income through IRS tax Form 982.”
- Gary Bode, rental property CPA and cancelled debt specialist
Form 1099-S
Form 1099-S may seem redundant if you’ve received Form 1099-A, but I’ve seen cases where the IRS asks about it in a correspondence audit. Best to include it on the tax return.
Ask your Rental Property CPA
Cancelled debt rules and implications on Schedule E are complex. You can’t reasonably rely on this website for tax return preparation advice alone. There are plenty of IRS wrinkles. Your specific fact pattern must be considered before implementing any strategy.
I’m a rental property CPA who offers a free phone consult. If your area doesn’t have a rental property CPA, please consider using us. The virtual office allows us to offer excellent client service wherever you are (910) 399-2705.
I have a question regarding cancelled debt on rental property. I still own the rental property and continue to pay the mortgage payments. The lender has decided in 2012 to cancel the 2nd mortgage ($67k) and part of the 1st mortgage ($20k) that were left unpaid when I modified the payments some two years ago. I received 1099C in 2012 totaling $87k and will be filing to exclude the debt cancellation for reason of insolvency. I have already determined that I qualify using the insolvency worksheet.
The cost of purchase of the rental property is $686k and the existing mortgages prior to the debt cancellation is in excess of $720k. My question is, do I have to expense the amount of debt cancellation from the cost basis even if the actual cost of the property is more than maximum cost basis allowed by IRS of $500k? I hope you understand my question…
Thanks so much!
-Kris
Help…
Sale of rental property
Hud-1 shows $131,000 with bank payoff of $120,273 and closing expenses.
No proceeds went to seller
1099-C issued for a total of $103,073.38 (2 1099-C, one to taxpayer one to spouse for 1/2 of the total amount shown above).
House purchased in January, 2005 for $191,321. Depreciation of $31,903 taken up to date of sell. Short sell in August, 2012.
I am not sure of how to handle the tax return.
Thanks, Jim
We handle our client through Pro Series software, Jim. I don’t know what your firm uses. Sounds like the cancelled debt is a “gimme.” But it affects the gain or loss of the rental property itself, via the tax attributes section of Form 982. I usually a spreasheet to calculate that, with the recapture of depreciation, unclaimed prior rental losses, tax attributes etc etc. Just so I know what the tax program should show. Hope that helps you and your client.
notice date irs
Your Rental Property CPA explains Cancelled Debt on Schedule E … is very good! Thanks!