If a client declares section 11 Bankruptcy and has two rental properties that are taken back by the bank, how do you determine if they have taxable income. One of the properties did not even get a
1099-C or 1099-A. What would be the sale price for this property be?
What's the basis for having taxable income?
If the debt exceeds the value, when someone is in bankruptcy cancellation of debt is not normally counted as taxable income.
As far as the sale price, properties are normally not simply taken over by the bank. There is a foreclosure sale, at which time the bank bids, along with others who wish to. The highest bidder gets the house. The highest bidder is usually the bank, and the bank usually bids the amount of the debt that is owed.
Your's may an exceptionally intricate situation. Chapter 11 is a reorganization that is most often used by corporations, though because it is business oriented it can be used by sole proprietors. Generally, when an individual winds up in a Chapter 11 it is because they have too much debt to get into Chapter 13 - for example, a homeowner with a mortgage over $1,081,400 can't get into Chapter 13.
Interestingly, because Chapters 11 & 13 are reorganizations, rather than liquidations, I assume it is possible to have some cancellation of debt income that would be taxable. But quite frankly, I'm not sure how that math would work. I've never had a client in a Chapter 11 so I've never worked through those calculations.
Gene E. Utterback, EA, RFC, ABA
As I recall, the statute says that recognizing income on cancellation of debt doesn't apply to any taxpayer "under title 11," meaning any kind of bankruptcy.
The Bankruptcy was not a Chapter 11, it was done under title 11. I'm not sure if that makes any difference.
It shouldn't. Section 108 says, "Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if ... the discharge occurs in a title
11 case,..."BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.