I have a client who received a 1099-C on his 2 family home which he lives in and rents the other half. The 1099-C was received due to renegotiation which his lender due to major drop in property value. Do I reduce his basis for each? Might there be any taxable income since 1/2 the property is rental?
Look at the previously filed Schedule Es to see if the client traced the loan to both his home and the rental. If he has been allocating interest to the rental, then he has to allocate the cancelled debt to the rental. This would be entered as rental income on the Schedule E. If all the interest expense has been going on the Schedule A, then he can use the tax exclusion to avoid cancellation debt income on his main home.
2 family home which he
Yes, the prior return shows as 1/2 rental. Rather than applying 1/2 of the 1099-C amount as rental income, could I just reduce the basis of both the rental and non-rental portion each by 1/2 of the 1099-C? I know this is the proper way to handle the non-rental half on a primary home, but am not sure about the rental half.
his 2 family home which he
My reading of the law is that canceled debt becomes rental income. This is consistent with how canceled personal debt is handled. I.e., it winds up on Line 21 of the 1040 as income.
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