How to report 982 DCI against offsetting losses

[dancer9]

If I have Form 982 Debt cancellation income, which is required to be netting against certain "tax attributes" (e.g. either reducing carryover losses, reducing basis, etc etc); where on the 1040 forms/schedules do you list that offsetting reduced tax attributes--my CPA wasn't sure...he listed the 982 DCI under "other income" on the front of the 1040, since it is in fact a 1099, but then just added a line in that same area for the offsetting tax attributes. Is this ok? Or should he not even have listed the 982 income on the front of the 1040 at all, and if that is your answer, --while the form 982 does show the offsetting tax attributes reduction amount; we need to somehow account for these reduced tax attributes elsewhere in the tax return...in my case my unused suspended losses that built up, which became available after the properties sold. sorry this sounds so complicated. I am sure you must have done someone's return by now to answer this question...THANKS!!

[Diane Kennedy]

The offsetting Form 982 goes against the basis.

Let me walk through an example:

Let's say you buy a property for $400,000 with 100% loan. Interest only payments. It's now worth $150,000 and you negotiate a short sale for that amount.

You'll get a Form 1099-C that shows $250,000 of CODI (Cancellation of Debt Income).

You also have a loss on disposition of the property of $250,000. (Basis is $400,000, sales price is $150,000)

But you've also got a Form 982 that wipes out your CODI.

Now without this attribution rule, you could end up with a net loss. Which would be cool, but the IRS isn't going to let you get away with it.

So, you have to reduce the basis to $150,000.

No CODI. No loss on disposition.

Did I understand that question correctly?

[dancer9]

Oh thanks for the answer I have been checking daily!!

So, you don't list the CODI on the 1040 at all, even though it is on a 1099? Isn't that an audit trigger in and of itself..?

then I still have my suspended losses from the property I CAN take due to the total disposition? right? (assuming I make less that the qualifying amount and materially participate), there is no $25,000 limitation right?

Do I have to reduce the basis first before reducing the carryover losses? or can you reduce any in any order.

[Diane Kennedy]

If you've got a Form 982, you do not need to report the cancellation of debt income. But you do need to reduce the basis.

So after you've reduced the basis, you still have a loss on the property? Is that what you mean? If so, then it will be a regular loss on disposition just like any other loss.

Losses on property are not subject to limitation BUT if you've previously aggregated the property activities, losses will be 'held' inside the group.

I don't mean to make this sound too tech-y, but it is a very complicated & precise part of tax law. It really is best to have an expert help you with the tax preparation.

[dancer9]

Ok got it, no I didn't aggregate nor did I file for Real Estate Professional, just for those reasons, so I can finally use my suspended loses from the short-sold property against my other income.

Ok, but if the 1099 debt cancellation income is NOT listed on the 1040 isn't that an audit trigger?

Second I have several short sold properties but the 982 only asks for a total amount, so basically I do the work of apportioning the correct amounts to the correct properties on the Form 4797 sale of biz property to show their respective reductions in basis, by their respective Debt Cancellation amounts....got it. BUT

HOW does the IRS discern this just from the lump sum on 982?? is filing the 982 itself going to be an audit trigger for this reason?

[Diane Kennedy]

Dancer, I understand what you mean about the trigger. But the instructions are pretty clear that you just report on the Form 982. I would attach a footnote explanation, just because I tend to over-explain if there is a question. I think that alone shows intend to be forthright and will squelch problems down the line.