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Jaykid007 · Feb 19, 2011, 10:00 PM

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

AtlantaTaxExpert · Mar 10, 2011, 01:21 PM

This issue was resolved via emails and a query with the National Association of Tax Professionals.

I ask the OP to post the results of those discussions.

Jaykid007 · Mar 10, 2011, 01:31 PM

And here it is:

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.

AtlantaTaxExpert · Mar 10, 2011, 01:41 PM

Thanks, JayKid.

It WAS a somewhat unusual case with NOT a lot of everyday application, but it shows the value of using a qualified tax professional in resolving complex tax issues.

Jaykid007 · Mar 10, 2011, 01:54 PM

Absolutely, was a very interesting, un common situation!