I am reading so many different opinions and non sense when it comes to reporting a 1099c received from cancelation of debt and the sale of property weather it's by short sale or foreclosure on rental property. I thought i would spend some time while watching my favorite football team loose today checking into the matter. Here is what the IRS says about it. If you would like to fact check my summary i received the information from IRS publication 544. I still plan on checking with a CPA and so should you because i am not a tax professional or claim to have all the answers.
This is for people who are reporting rental income and loss on a schedule E for recourse debt. You have to report as ordinary income the amount of canceled debt on any amount that's over fair market value of the property. In my case the fair market value is the sales price of $55,000 and the canceled debt would be about $85,000 so i'm looking at rental income of $35,000. This income is seperate from any gain or loss we would have from the sale of the property. Now the good part about this and this is were i was confused and thought i would have to pay income tax on that amount. We can report that cancelation of debt income on Schedule E as income in the same way you were receving income from a renter. It doesn't get reported on line 21 on your 1040 like it would if it was a primary home. This is great news if you're way upside down in youre rental home because the loss generally will offset the income gain!!!!!!!! It gets reported as business/rental income and the losses you have from the sale generally in this market environment will offset the income..........So hopefully that makes sense and helps someone who is seeking for answers on that topic.