Discussion Archives:Bankruptcy and Rental Property

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Discussion Forum Index --> Advanced Tax Questions --> Bankruptcy and Rental Property


Discussion Forum Index --> Tax Questions --> Bankruptcy and Rental Property

Jeremy C (talk|edits) said:

14 February 2011
First and foremost, thank you very kindly for any that respond to my inquiry. Secondly, I have searched the various posts regarding my situation and the "water is a bit muddy" still.

I have a taxpayer that filed for bankruptcy in 2010. Within the bankruptcy, the taxpayer included a converted rental property (prior primary residence) that has produced a small operating loss carryover with very little depreciation. Given that it is included in a bankruptcy I understand their will be no debt forgiveness income but am a bit perplexed on how to handle a gain/loss. Does the bankruptcy estate "inherit" any gain/loss on the sale of the rental property or is this a 1040 reported transaction? If reported on the 1040, how is the FMV determined if there will not be a 1099 issued given that the forgiveness is done within a bankruptcy? It is recourse debt (residence/rental is located in CA but was refinanced). The adjusted basis on the property is close to the amount of debt forgiven, but the FMV is substantially lower. If reported on 1040, the loss will be reported and then shown on Form 983 as a reduction of tax attributes? After the bankruptcy, the net equity in the taxpayers belongings is maybe $20,000....do you reduce the basis in their various personal belongings? Also, the taxpayer kept the mortgage and their primary residence but have little to no equity in the home. Would you still reduce the basis in the home given no equity? My thought is that you do not reduce the basis in the assets below the equity within the taxpayers personal balance sheet. Do you file Form 983 on date of filing for bankruptcy or the date of discharge, i.e. the two events hurdle different tax years.

Again, thank you in advance for any insight regarding this set of circumstances.

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