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Representing Representing Small Business OwnersSmall Business Owners

WWhen Chapter 11 hen Chapter 11 is not an Optionis not an Option

It Ain’t NoDay at the

Beach!!© 2009 All rights reserved including movie rights.No part of this presentation may be taken as or construed to be the giving of legal advice, and is not to be considered written tax advice for purposes of avoiding IRS tax penalties.

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Tax Consequenceof

Short-Sales

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Learn Learn

Tax Law in Tax Law in

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When Debt Greater Than FMVWhen 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

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Gain/Loss from Sale or Gain/Loss from Sale or Exchange of PropertyExchange 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.

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Gain/Loss from AssetsGain/Loss from Assets

Generally, property used in TorB, or real estate rentals, results possible short- or long-term capitalcapital gain, or ordinaryordinary loss.

Gain on “principal residence” could be tax-free (§121).No deduction for loss; extra gain is capital.

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Forgiveness of Debt IncomeForgiveness of Debt Income(a/k/a COD 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.

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COD COD ((Cancellation of Debt Cancellation of Debt

IncomeIncome))Is Ordinary income unless:

1. Principal Residence or

2. TP is “insolvent” or

3. Discharged in BK

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COD Income on COD Income on Principal ResidencePrincipal Residence

COD not taxable (even if solvent/no BK) if:

1. Was debtor’s principal residence (§121) for periods aggregating 2 of last 5 yrs

2. The write off occurred in ‘07-’12

3. Doesn’t 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)).

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Insolvency

Excess of Indebtedness(mortgages, credit cards, medical bills, judgments)

Over

Fair Market Value of Assets (Including exempt assets!)

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Tax ReportingTax Reporting

1. Use form 982

2. Must reduce remaining tax attributes (reduce basis in home, NOL’s, etc.)