4 When Debt Greater Than FMV Debt is $400,000 FMV is $350,000 AB is $300,000 $50k gain from sale/exchange $50k COD income Debt is $400,000 AB is $350,000 FMV is $300,000 $50k loss from sale/exchange $100k COD income
5 Gain/Loss from Sale or Exchange of Property Amount Realized ( FMV property), less Adjusted Basis (Amt. paid less deprec.), equals Gain/Loss on Sale or Exchange** ** The tax problem people need to worry about most.
6 Gain/Loss from Assets capital ordinary Generally, property used in TorB, or real estate rentals, results possible short- or long- term capital gain, or ordinary loss. Gain on principal residence could be tax- free (§121). No deduction for loss; extra gain is capital.
7 Forgiveness of Debt Income (a/k/a COD Income) Amount of Indebtedness prior to write- off, Less Fair Market Value of Property at time, Equals Gain from Discharge of Indebtedness** ** This tax problem is not as worrisome.
8 COD ( Cancellation of Debt Income ) Is Ordinary income unless: 1. Principal Residence or 2. TP is insolvent or 3. Discharged in BK
9 COD Income on Principal Residence COD not taxable (even if solvent/no BK) if: 1.Was debtors principal residence (§121) for periods aggregating 2 of last 5 yrs 2.The write off occurred in 07-12 3.Doesnt exceed $2million (joint return) 4.Is secured and was incurred for acquiring, constructing or substantially improving the property (or refinancing same but only to same extent) (§163(h)(3)(B)).
10 Insolvency Excess of Indebtedness (mortgages, credit cards, medical bills, judgments) Over Fair Market Value of Assets (Including exempt assets!)
11 Tax Reporting 1.Use form 982 2.Must reduce remaining tax attributes (reduce basis in home, NOLs, etc.)