Bankruptcy - Rental Real Estate


L

Luka

If a client declares section 11 Bankruptcy and has two rental
properties that are taken back by the bank, how do you determine if
they have taxable income. One of the properties did not even get a
1099-C or 1099-A. What would be the sale price for this property be?
 
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S

Stuart A. Bronstein

Luka said:
If a client declares section 11 Bankruptcy and has two rental
properties that are taken back by the bank, how do you determine
if they have taxable income. One of the properties did not even
get a 1099-C or 1099-A. What would be the sale price for this
property be?
What's the basis for having taxable income?

If the debt exceeds the value, when someone is in bankruptcy
cancellation of debt is not normally counted as taxable income.

As far as the sale price, properties are normally not simply taken
over by the bank. There is a foreclosure sale, at which time the
bank bids, along with others who wish to. The highest bidder gets
the house. The highest bidder is usually the bank, and the bank
usually bids the amount of the debt that is owed.
 
G

Gene E. Utterback, EA, RFC, ABA

Luka said:
If a client declares section 11 Bankruptcy and has two rental
properties that are taken back by the bank, how do you determine if
they have taxable income. One of the properties did not even get a
1099-C or 1099-A. What would be the sale price for this property be?
Your's may an exceptionally intricate situation. Chapter 11 is a
reorganization that is most often used by corporations, though because it is
business oriented it can be used by sole proprietors. Generally, when an
individual winds up in a Chapter 11 it is because they have too much debt to
get into Chapter 13 - for example, a homeowner with a mortgage over
$1,081,400 can't get into Chapter 13.

Interestingly, because Chapters 11 & 13 are reorganizations, rather than
liquidations, I assume it is possible to have some cancellation of debt
income that would be taxable. But quite frankly, I'm not sure how that math
would work. I've never had a client in a Chapter 11 so I've never worked
through those calculations.

Gene E. Utterback, EA, RFC, ABA
 
S

Stuart A. Bronstein

Interestingly, because Chapters 11 & 13 are reorganizations,
rather than liquidations, I assume it is possible to have some
cancellation of debt income that would be taxable. But quite
frankly, I'm not sure how that math would work. I've never had
a client in a Chapter 11 so I've never worked through those
calculations.
As I recall, the statute says that recognizing income on cancellation
of debt doesn't apply to any taxpayer "under title 11," meaning any
kind of bankruptcy.
 
L

Luka

Your's may an exceptionally intricate situation.  Chapter 11 is a
reorganization that is most often used by corporations, though because it is
business oriented it can be used by sole proprietors.  Generally, when an
individual winds up in a Chapter 11 it is because they have too much debt to
get into Chapter 13 - for example, a homeowner with a mortgage over
$1,081,400 can't get into Chapter 13.

Interestingly, because Chapters 11 & 13 are reorganizations, rather than
liquidations, I assume it is possible to have some cancellation of debt
income that would be taxable.  But quite frankly, I'm not sure how that math
would work.  I've never had a client in a Chapter 11 so I've never worked
through those calculations.

Gene E. Utterback, EA, RFC, ABA
The Bankruptcy was not a Chapter 11, it was done under title 11. I'm
not sure if that makes any difference.
 
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S

Stuart A. Bronstein

Luka said:
The Bankruptcy was not a Chapter 11, it was done under title 11.
I'm not sure if that makes any difference.
It shouldn't. Section 108 says, "Gross income does not include any
amount which (but for this subsection) would be includible in gross
income by reason of the discharge (in whole or in part) of
indebtedness of the taxpayer if ... the discharge occurs in a title
11 case,..."
 

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