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Discussion Forum Index --> Tax Questions --> Bankruptcy and gain
Bgcpa (talk|edits) said:
| 29 March 2007
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| I have a client who had 2 rental properties with associated debt(one recourse and one not), reposessed and reported on form 1099-A, but who first filed Chapter 7 bankruptcy. The 1099-A in both cases shows FMV greater than his basis in the property. After researching, Cancellation of Debt income is an issue, but not taxable by filing form 982 for the one property but it appears the gain created on forclosure is taxable, even in a chapter 7 bankruptcy. Am I understanding this correctly? And if so is it taxable to the estate created, which has no assets?
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Riley2 (talk|edits) said:
| 29 March 2007
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| I think you may be confusing the gain on foreclosure with the debt cancellation income. If your client lost a property through foreclosure, the debt is treated as the sales price on Form 4797 to the extent of the fair market value of the property. Any debt in excess of the "deemed sales price" will probably be nontaxable debt cancellation income if the taxpayer's personal liability is discharged in bankruptcy . In the case of nonrecourse debt, the entire debt is treated as the sales price and there would be no COD income.
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Bgcpa (talk|edits) said:
| 30 March 2007
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| Understood. The COD income created ends up being non-taxable because of the Chapter 7 bankruptcy and form 982 makes it go away. My confusion comes from the lack of clarity in the instructions in Pub 908 about the reporting of the 4797 gain (separate from the COD income). The client has not been good about keeping records on his cost basis. You would figure that he couldn't borrow $60,000 on an improvement loan for a property that cost him $15,000, but he has no backup for amounts spent. As a result, he has a computed gain of $40,000 on the 4797. The instructions for bankrupcty allude to the creation of an estate and 1041 filing; in practice I wonder how often this happens and if the gain is reported by the individual or the bankruptcy estate - or if it matters. To cut to it is there any scenario where this gain (difference between FMV of property given up and basis) is not taxable given the Chapter 7 filing - which did happen before the abandoment / foreclosure?
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