Finally my turn with Form 982 and I need help

[Margaret CPA in OH]

I just can't follow the instructions for this stuff. Client had condo but was relocated with job. Client couldn't sell in 2010 when moving so rented. Client lost job in 2012 finally getting another paying half. Result was that condo has to be sold for way less than hoped as client could no longer subsidize expenses.

Condo basis $150,000, dpn $14,090. Contents $1200, dpn $883. Selling price $92,000. First mortgage 1099-C, $57,023; second mortgage 1099-C, $30,858.

I believe this is qualified real property business indebtedness, right? I am confused by the reduction of tax attributes Part II. I found the data entry on Other Income for the 1099-C additions but not where or how to take out the amount excluded or how to account for any reduction to the amount excluded.

Thanks for some hand holding here. I know several of you have been through this but this is a first for me and, frankly, I am lost.

[Pacun]

Did he ever lived in the Condo? I think this is a personal residence and if he is insolvent, file 982 to include both 1099-C.

Remember to report the sale on Schedule D and form 8949.

[Margaret CPA in OH]

Yes, he used to live in it but it has been a rental since October 2010, so 2 1/2 years. Because it was rental and the second mortgage was obtained after it was placed in service, wouldn't it be business property? Why wouldn't it be 4797 when depreciation has been taken for the rental period?

If it would still be considered personal residence, how do I dispose of the business part? I still don't understand what to file on 982. I have read the instructions and Pub. 4681 but I still can't quite get it.

Thanks for guidance as I am just not comfortable with this at all.

[Lee B]

Actually I had fairly similar scenario several years ago. At the start I got distracted with form 982 and all that stuff.

Really it will turn out quite nicely, since it's rental property, the 1099 C s reduce basis, in my case the taxpayer

still ended up with a deductible capital loss. I didn't try to add up all your numbers and I didn't see any closing

costs mentioned. Ballparking it, it looks like you are in the area ranging from a small capital gain to a small

capital loss. An added clarification, you do end up using Form 982 to reduce the basis in the condo

by the total amount of debt cancellation on line 4. Then you enter the relevant sale numbers using the

reduced basis just like you would if the debt cancellation never happened.

[Margaret CPA in OH]

Thanks, cbslee! So this disposition does not go on 4797 at all? What about the Sec. 1245 assets put into it (stove, refrigerator, etc.) when rented? Is this also capital, not business? Is the basis reduced somehow on those items or only the condo? For the condo basis, do I reduce the adjusted basis (after depreciation) by the 1099C amounts or only the first from the first mortgage or both mortgages? Then to enter on Schedule D, use whatever that reduced basis is for the basis?

Closing costs were $5700.

How do I get the assets off Fixed Assets if I don't use 4797? How do I arrive at the number on Line 4? How is that different from Line 2? If this is now back to principal residence and capital, how can I consider this business indebtedness?

So sorry to be so dense. I am obviously missing some very obvious details (to others) and can't see the forest for the trees.!

[Lee B]

Margaret,

I wasn't trying to give you a step by step how to do it list.

1. Form 982 is used to reduce the original basis in the Condo, no effect on depreciation & accumulated depreciation.

2. The number on Line 2 & 4 are usually the same.

2. Once Form 982 is complete input the sale, including the 1245 assets thru Form 4797 that exact same way you would if the 1098 Cs didn't exist, except that the original basis of the condo has now been reduced by $87,881.

I had to go back and look at a 2011 return to refresh my memory.

I hope I've made it clear enough

[BulldogTom]

I just can't follow the instructions for this stuff. Client had condo but was relocated with job. Client couldn't sell in 2010 when moving so rented. Client lost job in 2012 finally getting another paying half. Result was that condo has to be sold for way less than hoped as client could no longer subsidize expenses.

Condo basis $150,000, dpn $14,090. Contents $1200, dpn $883. Selling price $92,000. First mortgage 1099-C, $57,023; second mortgage 1099-C, $30,858.

I believe this is qualified real property business indebtedness, right? I am confused by the reduction of tax attributes Part II. I found the data entry on Other Income for the 1099-C additions but not where or how to take out the amount excluded or how to account for any reduction to the amount excluded.

Thanks for some hand holding here. I know several of you have been through this but this is a first for me and, frankly, I am lost.

Margaret,

You need to slow down and take this one step at a time. The 982 is the last step in the process.

First, you have a sale of a rental property. Run the sale in the normal way. Put a bulk sale together in ATX and sell the property with a sales price of 92,000. The result is going to be a loss on the 4797. Do not do anything with the basis, as the 982 reduction in tax attributes does not take effect until the first day of the new tax year for the client. DO NOTHING WITH THE BASIS AS A RESULT OF THE CANCELLED DEBT IN 2013. You should have a loss of about 40K flowing to the front of the 1040.

Second step is to work with the cancelled debt. Enter in the 1099C information and put it on line 21.

Third step is to work with the 982. I forget the ordering rules, but I think it goes bankruptcy, insolvency and then qualified business property. Was the client insolvent immediately before the cancellation of the debt? Most likely he was, because he had a condo with a FMV of 92K and mortgage debt of 87K. If he was in as bad of shape as you say he was, I am guessing he was insolvent. Go through the worksheet on insolvency and see to what degree he was insolvent. If he was not insolvent, then look at the rules for Qualified Businss Property. I know there is a lot of disagreement about wether a rental activity rises to the level of a business. Especially given the circumstances under which he started renting the property. This may or may not be a viable option.

Does this make sense on how to attack this problem?

Tom

Hollister, CA

[Margaret CPA in OH]

Thanks so very, very much, Tom! This may seem simple to some but not so much to me. And I never expected any of my clients to be faced with this.

I input the sale data and arrived at ~ $24,000 loss. There was a PAL adjustment of $26,553 from Form 8582 for special allowance for rentals with active participation the standard for which I believe he met.

I will have to ask him to complete the insolvency worksheet but my guess is that he was not insolvent when considering retirement assets. Of course, if he had to liquidate everything to pay the tax, then he would be insolvent.

I reread the qualified rp business info and think this works. However, in the example it mentions that the basis in the depreciable property must be reduced by the cancelled debt. So does that then mean that the disposition of the condo must now be changed to basis of $135,090-$87,881=$47, 209 and then the sale is $92,000-$47,209 and thus a gain of $44,791? And how does Form 982 data enter into any calculations? I just don't see where the data flows. The examples in Pub. 4681 all seem geared to principal residences. I sort of understand the first one but not the others.

And I have no understanding about your comment that "the 982 reduction in tax attributes does not take effect until the first day of the new tax year for the client. DO NOTHING WITH THE BASIS AS A RESULT OF THE CANCELLED DEBT IN 2013." He owes $21,000+ without something on 2013 and I know he cannot pay it. Does he just owe and owe and wait until filing for 2014 to do something with this?

I so appreciate your time and assistance. I think if I have any more of these, I will pass!

[BulldogTom]

Margaret,

I am doing this from memory right now, but I am pretty certain that the reduction of tax attributes from exclusion of cancelled debts only takes place on the first day of the next tax year for the taxpayer. I will need to go back and read the text on Qualified Business Property to see if that exclusion requires the reduction of basis before the debt is excluded. That does not sound correct to me, as it would negate the use of the exclusion. If you have to increase your basis by the amount of discharged debt, you just shift the discharged amount to gain on the disposition. I don't think that is how the mechanics of the exclusion works. I think that the only time you have to reduce the basis of the property which is subject to cancelled debt is when you keep the property. In his case, the property is gone, so there is nothing to reduce basis against.

Let me look at this again tonight when I have my source material in front of me.

Tom

Hollister, CA

[Margaret CPA in OH]

Thanks again, Tom. I reread the 982 instructions. Line 1d mentions the amount excluded limited to ...(as of the first day of the next tax year or, if earlier, the date of disposition). I think 'if earlier' is operative here so it seems 982 is included in the 2013 return.

The fog is a bit less hazy now, but not much! I look forward to your later reply and, again, thank you so very much!

[David1980]

Usually the basis reduction would occur at the start of the following year. For example with insolvency. However, the qualified real property business indebtedness exclusion is a little different.

From pub 4681:

"The basis reduction is made at the beginning of 2014. However, if you dispose of your depreciable real property before the beginning of 2014, you must reduce its basis (but not below zero) immediately before the disposition."

[Margaret CPA in OH]

David1980, that makes perfect sense! My old eyes must have been glazing over at that passage. I have read the pub but admit to not digesting every word. I still then am foggy on where/how to reduce basis. If I do this before disposal, do I change it in Fixed Assets before the 4797 calcs? If so, as I posted earlier, he would show a gain of $47,000. That plus including $87,000 of COD would be impossible for a tax to pay. I clearly am missing things here.

Thanks for whatever help you are willing to provide. I did send him the insolvency form to complete. We shall see what that reveals!

[David1980]

Well the whole point in using 982 is so that you don't have to report the $87k of COD in income. You would be looking at just the gain. (Which if you end up qualifying on insolvency will be loss instead of gain.)

The selling price of $92,000 plus the 1099-C results in $179,881. It appears they owed approx 180k? But the basis before depreciation is only 150k? Did they refinance and pull money out? Or maybe used an equity loan to improve the home? Maybe that 30k increases basis or helps in some other way?