1099-A and abandonment

[Margaret CPA in OH]

Client abandoned a rental property in mid-2013.  It sold at auction in March 2014.  He received a 1099-A but not 1099-C.  Balance outstanding was $109,861, FMV of property was $40,000 and that's what it sold for at sheriff's sale.

 

I've input details on Fixed Assets (abandonment, date, allocation of sale price, etc.).  Result is loss of $21,045.  I input into 982 the total amount of discharged indebtedness on Part I line 2. Pub. 544 says lender should provide 1099-A and "'if lender also cancels part of your debt and must file Form 1099-C, the lender may include the information about the foreclosure or repossession on that form instead of on Form 1099-A and send you Form 1099-C only."  If there is only 1099-A, is that discharge/cancellation of debt?  Or do we wait until or if a 1099-C arrives?  Is it not discharge of indebtedness?

 

On 982 I'm not sure what to put on lines 4 and 5 in Part II - the difference between the $109,861 unpaid balance and the FMV/selling price on 4 and accumulated depreciation on 5?

 

I did one of these in 2013 but it went very smoothly because, in part, there was a 1099-C, not 1099-A.

 

I don't see how he can take a big loss without showing somewhere the unpaid debt.  I don't see where the unpaid debt is included in income anywhere.  Should the basis of the rental be reduced by the unpaid debt amount?

 

My brain is just not working with this and I'm fretting about an ACA issue, too.  Thanks for any input.

[Jack from Ohio]

Client abandoned a rental property in mid-2013.  It sold at auction in March 2014.  He received a 1099-A but not 1099-C.  Balance outstanding was $109,861, FMV of property was $40,000 and that's what it sold for at sheriff's sale.

 

I've input details on Fixed Assets (abandonment, date, allocation of sale price, etc.).  Result is loss of $21,045.  I input into 982 the total amount of discharged indebtedness on Part I line 2. Pub. 544 says lender should provide 1099-A and "'if lender also cancels part of your debt and must file Form 1099-C, the lender may include the information about the foreclosure or repossession on that form instead of on Form 1099-A and send you Form 1099-C only."  If there is only 1099-A, is that discharge/cancellation of debt?  Or do we wait until or if a 1099-C arrives?  Is it not discharge of indebtedness?

 

On 982 I'm not sure what to put on lines 4 and 5 in Part II - the difference between the $109,861 unpaid balance and the FMV/selling price on 4 and accumulated depreciation on 5?

 

I did one of these in 2013 but it went very smoothly because, in part, there was a 1099-C, not 1099-A.

 

I don't see how he can take a big loss without showing somewhere the unpaid debt.  I don't see where the unpaid debt is included in income anywhere.  Should the basis of the rental be reduced by the unpaid debt amount?

 

My brain is just not working with this and I'm fretting about an ACA issue, too.  Thanks for any input.

You must report the rental as a sale.  Using the amount of the debt forgiven as the sales price.  Recapture of depreciation as normal.  This may produce a taxable gain.  1099-A is NOT debt cancellation.  It is a sales document and must be treated as such.  FMV has NO place in these entries.

 

Form 982 is NOT proper here.  This is NOT debt forgiveness.

Edited March 6, 2015 by Jack from Ohio

[kcjenkins]

I agree with Jack.

[Margaret CPA in OH]

Thanks Jack and KC.  I'm just a bit confused by your answer, though, Jack.

 

"You must report the rental as a sale.  Using the amount of the debt forgiven as the sales price.  Recapture of depreciation as normal.  This may produce a taxable gain.  1099-A is NOT debt cancellation.  It is a sales document and must be treated as such.  FMV has NO place in these entries.

 

Form 982 is NOT proper here.  This is NOT debt forgiveness."

 

In large bold type you state 'using the amount of debt forgiven... then go on to say, "This is NOT debt forgiveness."  So, if this is NOT debt forgiveness, how can I use "the amount of debt forgiven as the sales price?"  Clearly I am missing something here.

 

I did use the figures as I think intended and as I first input before deciding I was wrong.  It came out to be the same $13,651 capital gain.    What are the chances of him receiving a 1099-C now?  I'm still now sure how these work together - or not - despite reading and rereading about this.  Thanks for your help!

 

 

[Jack from Ohio]

He may still receive a 1099-C which is the document to show how much the financial institution wrote off as bad debt.  At that point, he may use Form 982 to have the amount of debt forgiven exempt from income.  Use Part II, Line 4 to enter the amount of the 1099-C when it arrives.  I have seen 1099-C forms issued as much as 2 years after the foreclosure.

 

Let me make it simple.  Use box 2 of 1099-A as the sale price.  You are confusing words and overthinking what I said.

 

He sold the property to the bank for the amount of the outstanding mortgage.

 

A large taxable gain is normal.

 

1099-A and 1099-C are two totally separate entities that are not connected for tax prep purposes.

Edited March 6, 2015 by Jack from Ohio

[Margaret CPA in OH]

Thanks so much, Jack.  I sort of thought that was the case but kept reading that some lenders may include on the C information that could/should be on the C or vice versa.  And that also explains why the only other one of these I had was much easier - no A, just C.

 

The legal document client received states "Plaintiff does not wish to seek personal judgment against (client) and as a result the Court does not grant personal judgment against (client) but rather a finding of default on the Promissory Note."  So my client was really ticked about the 1099A and assumed that it meant nothing.  The legal document also lists that the Court finds the total due Plaintiff is the $109,861 plus interest and other items totaling $115,146.  So, if they send a 1099-C, it might be at that amount, right?

 

I'm curious, though. As the property was sold at auction for $40,000 and the proceeds less some small expenses of sale went to the lender, wouldn't that change the total for which my client is responsible?  Maybe that gets deducted from the $115,146 for the 1099-C?

 

Thanks again for all your patient assistance.  I have so few clients with issues like this so I always like to double check with this experienced group.

[Jack from Ohio]

Thanks so much, Jack.  I sort of thought that was the case but kept reading that some lenders may include on the C information that could/should be on the C or vice versa.  And that also explains why the only other one of these I had was much easier - no A, just C.

 

The legal document client received states "Plaintiff does not wish to seek personal judgment against (client) and as a result the Court does not grant personal judgment against (client) but rather a finding of default on the Promissory Note."  So my client was really ticked about the 1099A and assumed that it meant nothing.  The legal document also lists that the Court finds the total due Plaintiff is the $109,861 plus interest and other items totaling $115,146.  So, if they send a 1099-C, it might be at that amount, right?

 

I'm curious, though. As the property was sold at auction for $40,000 and the proceeds less some small expenses of sale went to the lender, wouldn't that change the total for which my client is responsible?  Maybe that gets deducted from the $115,146 for the 1099-C?

 

Thanks again for all your patient assistance.  I have so few clients with issues like this so I always like to double check with this experienced group.

The 1099-C will reflect the actual amount the bank writes off as a bad debt.  The amount the house sells for SHOULD lower the amount of the debt cancellation.

[Margaret CPA in OH]

Thanks again, Jack.  I will alert the client that he may be receiving a 1099-C in the future.  Hopefully they will not but it's Wells Fargo and I don't think they have a heart.  He will be so very unhappy.  Mostly he understands I am the messenger, though.

[BulldogTom]

Jack has given very good information.  I can't think of anything to add to it.

 

Tom

Newark, CA