Taxpayer owns rental real estate with adjusted basis of $185,000.

Taxpayer has first and second mortgages secured by this real estate discharged in Chapter 11 bankruptcy.

Taxpayer receives Form 1099-A on the first mortgage, indicating balance of principal outstanding $220,000, fair market value $180,000, borrower NOT personally liable for repayment. 

Taxpayer receives Form 1099-C on the second mortgage, indicating debt discharged in bankruptcy of $60,000 and borrower IS personally liable for the repayment.

Please provide guidance how to report on Form 1040.

In response to rvd71's comment:

Taxpayer owns rental real estate with adjusted basis of $185,000.

Taxpayer has first and second mortgages secured by this real estate discharged in Chapter 11 bankruptcy.

Taxpayer receives Form 1099-A on the first mortgage, indicating balance of principal outstanding $220,000, fair market value $180,000, borrower NOT personally liable for repayment. 

Taxpayer receives Form 1099-C on the second mortgage, indicating debt discharged in bankruptcy of $60,000 and borrower IS personally liable for the repayment.

Please provide guidance how to report on Form 1040.

Dear rvd71:

If this has happened in bankruptcy, the Trustee in bankruptcy should be responsible for dealing with the transactions, rather than the property owner.  If the proeprty was abandoned back to the owner/debtor, then the propety would  be treated as "sold" in full satisfaction for the non-recourse debt (the one they are not personally responsible for) and the associated adjusted tax basis of the property would be offset against the "sales price" of the debt satisfied - report the "sale" on a Form 497 (for federal) and Schedule D for MA.  The amount from the Form 1099-C should be disclosed on the return, but reduced by the debt exclusion permitted under Section 108 for debt relief under bankruptcy and reported on a Form 928 as income that is excluded under the bankruptcy exception to income recogniztion.

Hope this helps in preparing your returns!

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

Katz, Nannis + Solomon, P.C.

Thank you.

Follow up: Does the $60K 1099C income reduce the basis of the abandoned rental property?

 

In response to rvd71's comment:

Thank you.

Follow up: Does the $60K 1099C income reduce the basis of the abandoned rental property?

 Dear rvd71:

Sorry, but the reference in my answer, above should be ro Form 982, not FOrm 928.

The adjustment to basis is only applicable to a DIFFERENT business or rental property, if one is owned by the debtor, in which case, an exclusion from income may be claimed and reported on Form 982, together with the details of the basis reduction to the other rental property (such reduction is treated as accumulated depreciation, subject to recapture on later sale of the affected property).

A simultaneous adjustment to basis from COD is only allowed for debt discharged for a principal residence, increasing the gain oni disposition (if sold or foreclosed), but to be offset by the exclusion for gain from the sale of the residence, if the debtor qualifies to claim the exclusion.

Hope this helps in preparing your returns!

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

Katz, Nannis + Solomon, P.C.