The taxpayer received a 1099-C related to rental property that was taken by the mortgage holder for non payment on the mortgage.  The rental house was worth less than the balance due on the mortgage.  I am looking as to how to treat the forgiveness of debt and the disposal of the property both on the federal 1040 and MA Form 1.

Let us assume some facts for simplicity sake.  Box 2 Amount of debt discharged 100,000.  Box 7 Fair market value of the property 90,000.  (This amount was blank on the 1099-C but determined by the balance on the mortgage less the debt discharged).  The cost of the property was 200,000 with accumulated depreciation at the date of short sale of 50,000.  Balance on mortgage was 190,000.

I would think that the forgiven debt would be on page 1 as income on the 1040 for 100,000 and the sale would be reported using the fair market value of the property 90,000 as the sales price using the depreciate basis as the cost.  How does that sound?  I hope that my hypothetical numbers make sence.

What would happen in the MA Form 1?

There was no bankruptcy involved

Thank you for your help.

 

 

In response to Knead2no's comment:

The taxpayer received a 1099-C related to rental property that was taken by the mortgage holder for non payment on the mortgage.  The rental house was worth less than the balance due on the mortgage.  I am looking as to how to treat the forgiveness of debt and the disposal of the property both on the federal 1040 and MA Form 1.

Let us assume some facts for simplicity sake.  Box 2 Amount of debt discharged 100,000.  Box 7 Fair market value of the property 90,000.  (This amount was blank on the 1099-C but determined by the balance on the mortgage less the debt discharged).  The cost of the property was 200,000 with accumulated depreciation at the date of short sale of 50,000.  Balance on mortgage was 190,000.

I would think that the forgiven debt would be on page 1 as income on the 1040 for 100,000 and the sale would be reported using the fair market value of the property 90,000 as the sales price using the depreciate basis as the cost.  How does that sound?  I hope that my hypothetical numbers make sence.

What would happen in the MA Form 1?

There was no bankruptcy involved

Thank you for your help.

 Dear knead2no:

 Your general analysis is correct.  The cancellation of debt (COD) would be reported as ordinary income nd the property would be treated as "sold" for the amount of debt that is "paid off" by the value of the property - reported on Form 4797.  This will result in a loss that is fully deductible for federal purposes against the COD income.  Any susplended passive activity losses associated with the rental property would also be allowed.

The result on the MA Form 1 is that the COD will be reported on page 1 and the loss will be reported on Schedule D as a capital loss.  Unfortunately, they may not be married on the MA return and a capial loss carryover will result from the "sale" of the property.

Hope this helps in preparing your returns!

Mark H. Misselbeck, C.P.A., M.S.T., Tax Princpal

Katz, Nannis + Solomon,  P.C.