COD & basis reduction

[Max W]

Client rec'd $40K Credit Card COD.   

The C/card was used in purchase of rental property.  Can he avoid tax on $40K by reducing basis of propert?

[BulldogTom]

I don't think so.   Off the cuff, I think if he is insolvent so that there is an exclusion of income, the basis of property has to be reduced for the amount of exclusion.   But I think the exclusion of income has to come first.

Tom
Longview, TX

[Abby Normal]

And you better prepare the IRS insolvency worksheet before you file because the IRS will ask for it. At least, they used to. I'm not sure if attaching the worksheet will avert a notice or not. And keep all the bank statements, etc. supporting the asset bases and liability amounts, on the day before the the debt was cancelled.

Was the 1099-C timely or several years later, like often happens.

[Max W]

5 hours ago, Abby Normal said:

And you better prepare the IRS insolvency worksheet before you file because the IRS will ask for it. At least, they used to. I'm not sure if attaching the worksheet will avert a notice or not. And keep all the bank statements, etc. supporting the asset bases and liability amounts, on the day before the the debt was cancelled.

Was the 1099-C timely or several years later, like often happens.

Not insolvent.  Client has equity in 3 rental properties.  I made a mistake, he financed a business with the cards, not the rentals. He has about $350K in additional credit card debt, but only $40K cancelled this year.  Business is gone since 2017.

So with the $350K, he would be insolvent.

 

 

[Lee B]

How the heck does someone build up $ 350 K in credit card debt?