I have a complicated situation that I can't seem to find the answers for in IRS publications or articles online. We had a rental that was formerly my husband's primary residence. It was converted to a rental 1/1/2015. Due to multiple lease cancellations and unapproved repairs by the management company, we could no longer make mortgage payments (11/2017.) We continued to rent it out until 6/2018, when the lender began the foreclosure process and the management company would no longer rent it out. We advertised on our own, but it remained vacant. Then our city was hit by Hurricane Michael in 10/2018. The rental sustained damage making it unlivable. As the property was still in the foreclosure process, and we were fighting it out with our insurance company, it remained vacant and unrepaired. The lender finally foreclosed 3/6/2020. We received a 1099-C for cancellation of debt (it was a recourse loan.)
Beginning in 2015, I reported the rental on Schedule E. We had losses every year, so we had several years of accumulated passive losses. When I filed our 2019 taxes (with Turbo Tax Online,) we had no income and no expenses, so I checked "I did not rent, nor attempt to rent, this property at all in 2019," which deleted the rental. Therefore, no depreciation was taken for 2019. But even if we had taken it, it would have been added to our passive loss carryover.
I am using the Turbo Tax Premier download for 2020. I thought I had figured out how to report all of this, but now I'm having second thoughts. Here's what I've done so far:
Things I am uncertain about:
I know this is a lot of information and I tried to explain the best I could. Any advice would be greatly appreciated.
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Yes, that was quite a change of events over the years. let me answer your questions one by one.
[Edited 03-29-2021|07:00 PM PST]
Thank you Dave. I'll respond to your answers.
Are you saying that if I do not amend 2019 to claim depreciation (which will create a carryover,) that I will still have to reduce my basis (as if I did claim it,) and I would not be able to adjust my passive loss carryover by the same amount? You also said I need to amend my 2019 first, but amended returns are taking months, if not longer, to be processed. Is it ok to go ahead and e-file my 2020 even if the amended return takes 6 months?
According to IRS Pub. 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments, page 3:
You must report any taxable canceled debt as ordinary income on:
• Schedule 1 (Form 1040), line 8, if the debt is a nonbusiness debt;
• Schedule C (Form 1040), line 6, if the debt is related to a nonfarm sole proprietorship;
• Schedule E (Form 1040), line 3, if the debt is related to nonfarm rental of real property
Turbo Tax Premier Desktop has a Canceled Debt Worksheet that guided me through everything. I had to switch to forms view to find it. It links the 1099-C to the Sch. E. The worksheet instructions state that it does not support AMT differences (which doesn't apply to our rental.) It also says: For secured debt, complete Part II, with the requested information about type, usage, and disposition of the secured property. If box 7a, 7b or 7c is checked, the property is treated as section 1250 property and the depreciation on line 12 is not recaptured. The Canceled Debt Worksheet does not support section 1250 depreciation expense recapture. (I have a loss, so this also does not apply, correct?) Perhaps this is why Turbo Tax does not handle it in the step-by-step and says to seek advice from a professional or read IRS publications (which I have EXTENSIVELY.) Everything I have read from IRS says that the CODI goes on Sch.E for a rental. Also, the calculations on this worksheet for figuring the gain/loss from a foreclosure are straight out of IRS Pub. 4681.
It's possible that I could have entered something incorrectly, so if it looks off, let me know. Everything goes to their correct forms and makes sense (at least to me.) I did a review and TT didn't find any errors. Here is the redacted worksheet from TT. I can post images of the other forms in the morning, like the Sch. E and 4797. Just posting this one has taken me hours lol, so I'm headed to bed.
Thanks again!
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