Insolvency exception to debt forgiveness

[LouD]

Client's rental property has been in the short sale process for over 12 months (bank has been turning down potential buyers but has not proceeded with any foreclosure activities). Looks like an approved buyer has been found and house will close in 60 days.

Client was single when purchased the property and when short sale process began, but he's now married.

To qualify for the insolvency exception to the debt forgiveness, does the wife's assets and liabilities come into play even though it's just his name on the loan and title? Could make a difference with her 401k account, so thought I would ask the question here first before having them pull all the asset and debt information for her.

[Pacun]

Since it is a rental property, debt forgiveness will not be cancelled because he was insolvent. He will have debt forgiveness to report and a business loss.

[LouD]

Since it is a rental property, debt forgiveness will not be cancelled because he was insolvent. He will have debt forgiveness to report and a business loss.

I did not see anything in Publication 4681 for Cancelled Debts that excluded rental properties from any of the avaialable exclusions (bankruptcy, insolvency, qualified principal residence, etc.) - did I miss something that specifically excludes rental properties?

Thanks for your help - it's much appreciated.

[joanmcq]

I don't see where insolvency can't be used on a rental. There is an ordering of applicable exemptions, and reducing the tax attributes may come before insolvency when it comes to a business property.

I think it was a bad time for him to marrry.

[jainen]

>>it was a bad time for him to marry<<

I don't know about that, but I wonder what SHE expects from a deadbeat. Anyway, to answer the original question, my opinion is that if he is excluding income on a joint return he would need to count all assets and liabilities of both spouses. On the other hand, if he is excluding income on a separate return, I think he would only count his separate assets, share of community assets, and any assets transferred to his wife.