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Rental Property CPA explains Cancelled Debt on Schedule E | Form 1099-C instructions | Schedule E instructions | rental property foreclosures and short sales | IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness and Form 1099-C Cancellation of debt

Form 1099-C CPA, Form 982 CPA. Cancelled debt CPA. Form 982 instructions. Form 1099-C instructions.

I think every rental property CPA became a Form 1099-C CPA during the recession. If you don’t have a local rental property CPA well versed in rental property cancelled debt, consider calling me for free consult at (910) 399-2705.

Hi, I’m a rental property CPA with a virtual office to serve long distance clients. Most rental property CPAs became Form 1099-C CPAs during the recession. Why? The sheer number of Form 1099-C(s) issued is staggering. Rental property foreclosures still ripple into 2018, My extended family and I own rental property, so I keep up with current issues on rental property. I’ve worked for real estate developers and construction firms. I have cancelled debt clients who are CPAs and tax attorneys. There’s even a CPA testimonial on this website. Unfortunately the Recession gave me lots of experience with rental property cancelled debt. When I was a brick and mortar CPA we never saw a single rental property cancelled debt case. And if we had the opportunity, I think we’d have passed because the rental property foreclosure and cancelled debt tax reporting requirements involve a steep learning curve. This post answers most questions I get on rental property foreclosures and short sales. It’s not comprehensive. Cancelled Debt from rental property foreclosure or short sale affects:

  • Schedule E, Supplemental Income and Loss.
    • The Schedule E instructions aren’t so great.
    • Form 8825 is basically the same as Schedule E and the Form 8825 instructions are an easier read.
  • Form 8825 Rental Real Estate Income and Expenses of a Partnership or an S Corporation.
    • While I handle S Corporation cancelled debt and Partnership cancelled debt, this post is on personal cancelled debt.
  • Form 1099-C, Cancellation of Debt. The Form 1099-C instructions are for the lenders and bankers.
  • Form 1099-A, Acquisition or Abandonment of Secured Property. The Form 1099-A instructions are for the bankers too.
  • IRS tax Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).
    • Want to know if you have a good rental property CPA well versed in cancelled debt? He’ll discuss the future tax implications of using Form 982.
    • I suggest doing some internet research before reading the Form 982 instructions. Just to pickup some of jargon and basic tax reporting requirements.
  • IRS tax Form 4797, Sales of Business Property.
    • Don’t default to your tax software’s number here.
    • Read the Form 4797 instructions.
    • Pull out the purchase HUD. Why? Many times the buyer’s settlement costs aren’t included in the rental property’s basis so you’ll pay an extra $1000 +/- in taxes.
  • Form 1099-S, Proceeds From Real Estate Transactions.
  • Form 8582.
    • Sometimes, maybe because your income is too high, you can’t use the special rental property passive loss allowance of $25,000. But you don’t lose that $25,000 deduction, it just gets deferred until you sell the rental property and then you can use it on the final Schedule E. The Schedule E instructions are a bit vague, but prior disallowed lasses flow into Schedule E from the carry forward amount on Form 8582, and then to Form 1040.
    • Depreciation for Form 4797 and prior disallowed losses on Form 8582 sometimes don’t transfer over when you change Form 1099-C CPAs or tax software. Don;t lose legitimate deductions.
    • Look at your old returns to see if that’s the case. That can be thousand of dollars in tax savings.
    • Don’t even try the Form 8582 instructions. They’re so complex I use a subscription database that makes the Form 8582 instructions easier to understand. Go figure. Plus the tables on Form 8582 sort of explain themselves.

“While Form 982 changed in 2018, rental property and Form 1099-C CPAs can still use the insolvency and qualified business indebtedness exclusions of Form 982 to keep the Form 1099-C income from becoming taxable income.” – Gary Bode, Form 1099-C CPA and rental property cancelled debt tax accountant

It’s not just homeowners that were hit by the economy, foreclosures and short sales 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. But the two issues overlap.
  • The bank takes possession of the rental property. This triggers a Form 1099-A. But sometimes, if they simultaneously cancel the debt, like with a rental property short sale. 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.
    • Any Form 1099-C CPA will say Form 1099-C(s) are notorious for being late.
    • Form 1099-A itself doesn’t incur any cancelled debt income.
  • Rental property foreclosure is a “sale” to the IRS. Both foreclosures and short sales require calculation of gain or loss on the sale through IRS tax Form 4797, Sales of Business Property. Be patient with the Form 4797 instructions.
  • 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.
    • Again it’s common for the 1099-A to arrive first, generating a large tax refund.
    • But Form 1099-C will be issued if the bank forgives the mortgage debt.
    • Form 1099-C doesn’t always mean the bank won’t try to collect. But it’s illegal.
    • It’s common for banks to not issue a Form 1099-A and go straight to the Form 1099-C.
  • The amount on Form 1099-C becomes rental income on Schedule E or Form 8825.
  • Rental property profit or loss from Schedule E flows into Line 17 of Form 1040.
  • Use Form 982 to exclude some or all 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. Talk to your local Form 1099-C CPA. Remember Form 982 can have future tax consequences.

Form 982 tax positioning

Sometimes in rental property cancelled debt cases, the Client can control, somewhat, the cancelled debt trigger event. If so, there are legitimate canceled debt tax position strategies that may help lower the tax bill.

Form 1099-C CPAs generally use more explanations and supplemental documentation

It’s a judgment call. But most red flags can be explained away.

I’m a rental property CPA who offers a free phone consult. If your area doesn’t have a rental property CPA who’s well versed in Form 1099-C tax consequences, please consider using us. The virtual office allows us to offer excellent client service wherever you are (910) 399-2705.

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