Cancelled debt

[joanmcq]

Client had house he rented out mid last year. Tenants paid deposit, trashed the place and ran. Bank repo'd house in November, I think., and zillow shows house as being sold Dec 7th for $139000. Main mortgage was for $257952 when cancelled. Not sure of client's basis in house, but he bought it for $210000 and did a lot of improvements. Also had an equity line which issued COD on 12/10/07 for $109670. However, equity line is listed on 1099-C as VISA, not equity line, even though credit union sent out 1098s for the interest paid.

Can I count debt & value of rental house when doing the insolvency equation? And if not, is there a possible loss on sale of rental property, if 'sold' to bank for $257952, if the basis was greater than that? Client went bk in Feb 2008, but since the credit union cancelled the 'visa' in december I can't use the bk. Clients owned another house they are upside down in, but not for the amount of the cancelled debt.

[Pacun]

Client had house he rented out mid last year. Tenants paid deposit, trashed the place and ran. Bank repo'd house in November, I think., and zillow shows house as being sold Dec 7th for $139000. Main mortgage was for $257952 when cancelled. Not sure of client's basis in house, but he bought it for $210000 and did a lot of improvements. Also had an equity line which issued COD on 12/10/07 for $109670. However, equity line is listed on 1099-C as VISA, not equity line, even though credit union sent out 1098s for the interest paid.

Can I count debt & value of rental house when doing the insolvency equation? And if not, is there a possible loss on sale of rental property, if 'sold' to bank for $257952, if the basis was greater than that? Client went bk in Feb 2008, but since the credit union cancelled the 'visa' in december I can't use the bk. Clients owned another house they are upside down in, but not for the amount of the cancelled debt.

You need to find the basis for the house, report any losses (long or short term) on Sch D and debt cancellation on line 21.

[jainen]

>>Can I count debt & value of rental house when doing the insolvency equation?<<

Yes, but only for the first one. You have to run a second insolvency equation after the foreclosure, when he doesn't have either the debt or the value.

[LindaB]

Client had house he rented out mid last year. Tenants paid deposit, trashed the place and ran. Bank repo'd house in November, I think., and zillow shows house as being sold Dec 7th for $139000. Main mortgage was for $257952 when cancelled. Not sure of client's basis in house, but he bought it for $210000 and did a lot of improvements. Also had an equity line which issued COD on 12/10/07 for $109670. However, equity line is listed on 1099-C as VISA, not equity line, even though credit union sent out 1098s for the interest paid.

Can I count debt & value of rental house when doing the insolvency equation? And if not, is there a possible loss on sale of rental property, if 'sold' to bank for $257952, if the basis was greater than that? Client went bk in Feb 2008, but since the credit union cancelled the 'visa' in december I can't use the bk. Clients owned another house they are upside down in, but not for the amount of the cancelled debt.

Did the taxpayer get a 1099-A or C for the foreclosure? According to the figures you have here, debt canceled of $257,952 and FMV of $139,000, there should be income of canceled debt of $118,952. You should figure the basis of the property. The sales price is the lesser of the debt canceled ($257,952) and the FMV ($139,000). Using the FMV for sales price, if his basis is (just guessing here) $260,000, there would be a capital loss of $121,000. Was this the taxpayer's main home before he rented it in the middle of last year?

From pub 908:

"Determine your liabilities and the fair market value of your assets immediately before the cancellation of your debt to determine whether or not you are insolvent and the amount by which you are insolvent."

As jainen said, you would figure insolvency twice, if he had two debts canceled. So again, did the taxpayer get a 1099-C for the foreclosure, or just one for the Visa?

[jainen]

>>As jainen said, you would figure insolvency twice, if he had two debts canceled<<

I was not referring to the second loan, but to the fact that debt relief can only be excluded to the extent he remains insolvent after the foreclosure.

[kcjenkins]

Also, rethink your statement that "Client went bk in Feb 2008, but since the credit union canceled the 'visa' in december I can't use the bk." That just supports the fact that he was still insolvent after the foreclosure. You do not have to be in the middle of the bankruptcy in order to use that as a defense against the taxation of the canceled debt. The issue is simply 'solvency', and the fact that he had to file bankruptcy even after the loss of the house just helps you establish that he was still insolvent. IRS will not fight you over that, once you put down that he filed BK.

[joanmcq]

No, one of the wierd things is he only got the 1099-C for the 'visa' second mortgage. The first one was nonrecourse debt, I believe. But no 1099-A either. I'll get the rest of the data for the insolvency equation tonight.