COD Tax Attributes (Form 982)

[Tax Prep by Deb]

I have a client who had a cancellation of debt of 105,000. We did the insolvency worksheet and they are definitely insolvent way past the amount of 105,000.

When I do the form 982 I have chosen #5 to reduce the basis of depreciable assets. They have a rental property as well as their personal residence. Which of these two would I reduce and if the rental property do I do it now or at the time they get rid of it? The basis in the rental property is 188,000 and the accumulative depreciation prior to this year was 41,302 leaving an adjusted basis as of December 31, 2008 146,698.

So then on the asset tab would I change the original amount of 188,000 to 83,000. How would any of you handle this? (this is new one to me, so I welcome any comment)

Deb!

[LindaB]

What was the $105,000 COD for? The rental property, credit card debt, or ?

[LindaB]

There is some information in pub. 334, chapter 5. Regarding reducing the basis of depreciable real property, it says to "Make this reduction at the beginning of your tax year following the tax year in which the cancellation occurs. However,if you dispose of the property before that time, you must reduce its basis immediately before the disposition."

This is for qualified real property business debt, but it's the only thing I have found in answer to your question about when to reduce the basis.

[Tax Prep by Deb]

What was the $105,000 COD for? The rental property, credit card debt, or ?

It was for the rental property. The bank when they did the loan modification lopped off that much of the principle.

[LindaB]

I have a client who had a cancellation of debt of 105,000. We did the insolvency worksheet and they are definitely insolvent way past the amount of 105,000.

When I do the form 982 I have chosen #5 to reduce the basis of depreciable assets. They have a rental property as well as their personal residence. Which of these two would I reduce and if the rental property do I do it now or at the time they get rid of it? The basis in the rental property is 188,000 and the accumulative depreciation prior to this year was 41,302 leaving an adjusted basis as of December 31, 2008 146,698.

So then on the asset tab would I change the original amount of 188,000 to 83,000. How would any of you handle this? (this is new one to me, so I welcome any comment)

Deb!

Pub. 908 on pages 24 and 25 cover your situation more than anything else I can find. It's the pub. for bankruptcy but this also covers insolvency. You would not be able to reduce the basis of their personal residence because (I assume) you're not depreciating it. Like the other one I mentioned, this also says you reduce the basis at the beginning of the year following the year in which the COD occurs.

This pub. doesn't exactly say how to reduce the basis, but look at the sections in the middle column of page 25, 'Election to reduce basis in depreciable property first' and especially 'Recapture of basis reductions.'

I think it might be better to treat the 105,000 as additional depreciation rather than reduce the original basis by that amount. You said accumulated depreciation at the end of 2008 was 41,302. I think you should continue that depreciation to the end on 2009, lets say that at the end on 2009 accumulated depreciation is 48,000, and adjusted basis at the end of 2009 is then 140,000. If you reduce the original price by the 105,000, that leaves you with an adjusted basis at the beginning of 2010 of 35,000:

188,000 purchase price minus 105,000 to reduce basis equals 83,000 minus accumulated depreciation equals 35,000.

If you treat the 105,000 as depreciation instead, you would end up with the same adjusted basis at the beginning of 2010:

188,000 purchase price minus 48,000 prior depreciation minus 105,000 additional depreciation equals 35,000.

Either of these will satisfy the requirement that "...a reduction of basis will reduce the amount of depreciation or amortization otherwise allowable for the period immediately following the basis reduction," because you would start depreciating 35,000 in 2010 (using the same time remaining I assume).

I think that using the 105,000 as additional depreciation better satisfies the requirements under 'Recapture of basis reductions' on page 25, so I'll leave it to you to read that and see if this makes any sense.