Tax Question Form 1099-A Issued
Posted: Mon Feb 08, 2010 6:41 pm
I am a tax preparer in Colorado and have run up against a situation that I do not have the correct answer for. I have called the IRS and got some help. I have talked to lawyers, CPAs, etc. but all give differing opinions. I am hoping to get help here, if possible.
My client received a 1099-A from the foreclosure of a rental property. No 1099-C has been issued yet as the debt has not been canceled as of today.
FMV = $100K
Outstanding Loan = $150K
Borrower is liable.
Assuming no depreciation over the years, and according to the IRS representative, I use the lesser of the FMV or the outstanding loan for the sale price. This leaves a $50K NOL reported on Form 4797. All seems good up to this point.
However, here is the problem. What happens when the debt is canceled?
Let's say, the debt is forgiven next year and the sale price was the $100K. Now, there is income of $50K, or is there more because we already reduced the basis in the property to $100K (The original NOL from the previous year). I'm assuming the NOL works the same way as depreciation would work, the amount depreciated reduces the basis in the home. I know I am hypothesizing, but I do not want my clients to be in a pickle the following year.
Also, my clients would qualify for being insolvent at the time of the foreclosure and also at the time of the cancellation (assuming nothing changes from now until that time). My clients are upside down on more than one property.
Thank you
My client received a 1099-A from the foreclosure of a rental property. No 1099-C has been issued yet as the debt has not been canceled as of today.
FMV = $100K
Outstanding Loan = $150K
Borrower is liable.
Assuming no depreciation over the years, and according to the IRS representative, I use the lesser of the FMV or the outstanding loan for the sale price. This leaves a $50K NOL reported on Form 4797. All seems good up to this point.
However, here is the problem. What happens when the debt is canceled?
Let's say, the debt is forgiven next year and the sale price was the $100K. Now, there is income of $50K, or is there more because we already reduced the basis in the property to $100K (The original NOL from the previous year). I'm assuming the NOL works the same way as depreciation would work, the amount depreciated reduces the basis in the home. I know I am hypothesizing, but I do not want my clients to be in a pickle the following year.
Also, my clients would qualify for being insolvent at the time of the foreclosure and also at the time of the cancellation (assuming nothing changes from now until that time). My clients are upside down on more than one property.
Thank you