So i'm just about to go through my taxes for last year and I have a 1099-C for a rental I short sold in 2009. The 982 Deficiency workout sheets seem simple enough and it seemed that I was very insolvent, more than what my 1099-C was forgiving me for so I thought i'd have no tax liability on it. Well my CPA tells me that I can only claim a portion of insolvency and not the much higher amount I had worked out on my 982 worksheet even though my assets were FAR LESS than liabilities. She directed me to a piece of wording that helps explain why I couldn't claim the full insolvency amount on my rental but I have no idea what the heck it means? Can anyone help me translate what this means? Here is the verbiage:
From IRS publication concerning Insolvency & Short sales:
"One more exception applies if your rental qualifies as Section 1231 property. In this case, you may be able to reduce the cost basis of the rental property without being insolvent. The result is that you don’t report the income from the debt forgiveness but you have a lower loss on the “sale’ of your property. To use this strategy, you must make an election and the debt forgiven must be “qualified acquisition indebtedness,” (i.e. debt incurred to acquire, construct or improve a property.)"
Again anyone know what this means? Is my CPA looking at an alternative option that is leaving me not able to be insolvent up to the forgiven amount? My liabilities are FAR in excess of the amount forgiven so I should be easily covered taking that route, but do rental's have a different set of guidelines?
Thanks in advance