I have rec'd garnishment against my wages but did not know about it until my employer
Deducted $ from my check.

Please clarify your question

Hello, I have a client that bought a rental home for 325k in 2005. He owed 281k on the rental property. He filed BK. He got a 1099-C that shows that the full 281k was forgiven and also showed he was personally liable. The BK box was checked on the form. I understand from the BK that he no longer has to pay taxes on the 1099-C and the debt is discharged. Secondly, he got a 1099-A that shows the fair market value of property to be $110k. The 110k was the sales price as well when the property was sold in auction. The 1099-A also shows the loan balance of 281k, same which was on the 1099-C. I was going to use the 100k as the sales price and the purchase price of $325k which creates a large loss. Is that the correct way to do it? It seems like I might use the 281k as the sales price to be more conservative but that's technically not the sales price, the 110k is. Please help! Thanks

Hello, I have a client ...
...
I was going to use the 100k as the sales price and the purchase price of $325k which creates a large loss. Is that the correct way to do it? ...
You mean $110 k (when you say $100k)?

You are his accountant?

I am not an accountant, but, yes, it does appear to be the correct way of doing his books, In my opinion, if that's what you are asking. I suppose there would be an additional entry to reflect the bankruptcy, but, as I say, I am not an accountant.

Yes 110k vs 100k I stated. I am the tax pro but I've asked cpa's and other tax pros and get different answers.

... I am the tax pro but ...

So you are doing the post-bankruptcy income tax return? It seems to me that the issue is how to show the bankruptcy on the return. The bankruptcy has in effect eliminated the imputed income shown on the 1099-C.

You will need to research the IRS instructions (http://www.irs.gov/pub/irs-pdf/p908.pdf) in order to figure out how to show that discharge on his return, but briefly, as I read it, you would not show the 1099-C amount as income.

Thanks. Yes I'm on board with no tax on the cancelled debt due to the bk. I guess the real question would I use the cancelled debt as the sales price or the fair market value. Thx for your help.

... would I use the cancelled debt as the sales price or the fair market value. ...

Don't forget, the bankruptcy estate files it's own return. So, if the debtor surrendered the property (in the Bankruptcy), the property wouldn't even appear in his personal, post bankruptcy return, would it?

Here's a reply from a tax attorney. Now the question is your question, to file a BK return or not. I need to ask the taxpayer sone more questions.
First of all since the taxpayer filed chapter 7 bankruptcy you will want to make sure that the deemed sale and cancellation of debt truly belong to the taxpayer or to the bankruptcy estate. When an individual files chapter 7 bankruptcy a new taxable entity is formed and the individual's assets and liabilities are transferred to that estate. But let's assume that the foreclosure and debt cancellation happened before the bankruptcy was filed. It is considered a deemed sale so you will want to report the sale on Form 4797 since it is a rental property. Both forms indicate that he was personally liable for the debt so that means that it was a recourse debt. If its recourse debt then the sales price will be the lesser of the FMV or the outstanding debt. In your situation this would be box 4. You are correct that if a taxpayer is bankrupt the cancellation of debt income is excludable on Form 982.

... report the sale on Form 4797 since it is a rental property.
...
sales price will be the lesser of the FMV or the outstanding debt
...
excludable on Form 982.

Ok. Thanks for the follow-up.

Sure thank you. These darn tax laws are often ambiguous!