Real Estate Investor · San Pablo, CA · Member since 2008 · 50 posts · 12 votes
I have a co-worker who did a deed in lieu on a rental property and subsequently received a 1099 for the difference between what the bank sold it for and what she owed on it, which was 144K. In order to avoid huge tax consequences, her CPA filed for insolvency. The CPA said that the amount (144K) would be applied to any capital gains received if she eventually sold her primary residence at a profit ten years down the road.
Can anyone explain this? Does this mean she owes the 144K if she makes a profit on her primary residence or does this mean she owes tax on it if she makes a profit in the future?
Another question is what if she shortsales, forecloses or does a deed in lieu on her primary residence and buys another primary residence in the future? Will this 144K "follow" her to that residence also? How many years does this hang around affecting her potential to profit in the future?
Thanks to anyone who can shed some light on this subject. I'm hearing conflicting information from different sources.
Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes
14y
I suggest you go to the IRS website to research your answer. The rental property is treated differently from your residence in these cases. In either case your are required to report the income in the year the debt is forgiven and you will most likely get a 1099 for that income for the year it was forgiven. If you are insolvent you will be a able to complete a form for IRS eliminating any tax . The act that pertains only to principal residence expires at the end of 2012 . I would contact the IRS and get their pamphlets on the matter. Try google, you will find what you need.
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
14y
Kathryn K.,
Your coworker will never have to pay any of the money back. Form 982 was used to report the insolvency to the IRS. and exempt that income from any tax. This is one separate transaction.
If she sells her primary residence, this is a whole other transaction in which she can gain and will not have to pay any tax. Depending upon how long her rental property was held and the exact terms of the situation she will not have a capital loss carryover for this purpose.
Again, that loss will stop there. If you would like I can explain this further for you.
Your friend will not have to worry about it from a tax standpoint going forward.