Discussion:Insolvent taxpayer - reduction of attributes

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Discussion Forum Index --> Basic Tax Questions --> Insolvent taxpayer - reduction of attributes


Discussion Forum Index --> Tax Questions --> Insolvent taxpayer - reduction of attributes

CAI (talk|edits) said:

6 May 2014
Taxpayer had loan modification (principal reduction) on primary residence $150K+

The debt/money that was discharged against her primary residence was not used to purchase or to improve the home.

Taking into account the reduction of attributes rules - can we elect to reduce the basis of this primary residence that had the debt discharged against, or do we have to first reduce the basis of her rental property?

Taxmonkey (talk|edits) said:

8 May 2014
You cannot elect to reduce basis in primary residence first. There is an election to reduce basis is depreciable property first 108(b)(5). When reducing basis in property, it is prorated across all property and you cannot reduce your basis in property below any loans secured by the property. So if FMV of the property = amount of mortgage then you cannot reduce the basis in the property.

Nightsnorkeler (talk|edits) said:

9 May 2014
So if FMV of the property = amount of mortgage then you cannot reduce the basis in the property.

Didn't you mean to say that if ADJUSTED BASIS of the property = amount of mortgage then you cannot reduce the basis in the property?

Wiles (talk|edits) said:

9 May 2014
Didn't you mean to say that if ADJUSTED BASIS of the property = amount of mortgage then you cannot reduce the basis in the property?

Didn't you mean to say that if the AGGREGATE adjusted basis of ALL property <= the amount of AGGREGATE LIABILITIES then you cannot reduce the basis in the property?

Taxmonkey (talk|edits) said:

10 May 2014
Yes, I meant to say adjusted basis, whoops, and Wiles is also correct that it is the aggregate adjusted basis below the aggregate liabilities.

And to clarify further, she may indeed have to reduce her basis in the rental property before reducing her basis in her primary residence. Section 108 requires that tax attributes be reduced in the following order:

1) NOL

2) General Business Credit Carryover

3) Minimum Tax Credit

4) Capital Loss Carryover

5) Basis in Property

6) Passive Activity Losses

7) Foreign Tax credit

However Section 108(b)(5) Allows for an election to have the basis in depreciable property reduced first. Assuming that the election is NOT made, and also assuming that the taxpayer does not have an NOL, General business credit, minimum credit or capital losses then the tax basis in property must be reduced in the order specified in 1.1017-1

(1) Real property used in a trade or business or held for investment, other than real property described in section 1221(1), that secured the discharged indebtedness immediately before the discharge;

(2) Personal property used in a trade or business or held for investment, other than inventory, accounts receivable, and notes receivable, that secured the discharged indebtedness immediately before the discharge;

(3) Remaining property used in a trade or business or held for investment, other than inventory, accounts receivable, notes receivable, and real property described in section 1221(1);

(4) Inventory, accounts receivable, notes receivable, and real property described in section 1221(1);

(5) Property not used in a trade or business nor held for investment.


Its likely that the rental property would be category 3, while her primary residence and other assets would be category 5.

Wiles (talk|edits) said:

11 May 2014
I agree

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