Hello-I am a tax-preparer doing a return for my client---She received a 1099s for $177,000- a short sale--dated:01-29-2009-She paid-$287,451 for the prop. on 06-02-2005--I have been reporting the income and expense on Sch.E since she put the home into service-38,920 in depreciation-she never made a payment on the house in 2009--then she got a 1099c--amount of debt cancelled is $90,425--she is not liable for the debt-fair market value is $135,000--she then got
a 1098 mortgage int. statement from the lender for $20,917?---she never made a payment?-she is not bankrupt-has very good job--how would you report this on her taxes?--Need help--David--
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You will report the sale of the property on form 4797
Accepted AnswerThe sales price is the FMV or $135,000 + Depreciation recapture.
The cost is what She paid $287,451 + any improvements.
You will claim the $90,425 on line 21 as other income and identify it as debt cancellation.
The mortgage interest and other expenses will still be deducted on Sch E.
Assuming She is in a Non-Recourse loan state She may not be liable to pay the lender and shortfall but debt forgiveness is still considered income and must be included as such.
If you net all the numbers together between the sale, depreciation recapture and debt forgiveness income she still ends up with a net loss of about of about $23,000 before Her Sch E deductions.
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