1099-MISC for loss of value of property-non taxable generally...but not in this case???

[jordankjcm]

I received a 1099-MISC with a Box 3 value in it for a property settlements for loss in value of property (an investment REIT).  Property settlements for loss in value of property that are less than the adjusted basis of your property are not taxable and generally do not need to be reported on your tax return.  (per PUB4345)  I cannot just forget that the investment firm sent me the 1099 (lest incur the wrath of the IRS), so I need to make an adjustment to my return.  The value in Box 3 is less than the value of the REIT at this point, so none of the Box 3 figure should be taxed as income.  I cannot figure out how to account for this "non-taxable" 1099-MISC data.  I called TurboTax Help desk but they could not find an answer.  I can just delete the 1099-MISC and hope for the best, but I learned in the Army that hope wasn't a strategy.  Please, can anyone help me?  Thanks!

[PatriciaV]

You have the option to report this as "Other Income" on your tax return.

1. Start in Federal Taxes >> Wages & Income >> Other Common Income >> Income From Form 1099-MISC. Click "Start" and work through the interview.
2. After entering the info from the 1099-MISC, continue until you see the question about this being connected to your main job, and say "no." Check only the box for 2021 income. Then answer that this was not an "intent to make a profit." Those three answers should classify this as "Other Income", which will appear on Line 8 on Form 1040.

If you wish to allocate cost or basis to this income, make another 1099-MISC entry with a negative value in Box 3 (but not more than the income amount). This will offset the income, and you will report only the net on Line 8.

[jordankjcm]

Thank you PatricaV.  I did that, and Line 8/1040 is populated with the 1099-MISC Box 3 data.  The issue is that this is counted as taxable income and it is really non-taxable per the IRS (as long as it does not exceed the value of the REIT-then the difference would be taxable.  Somehow I need to note this 1099-MISC as non-taxable so TT doesn't use it in the tax calculations or cancel it out someway.  

[PatriciaV]

Since you received Form 1099-MISC with income in Box 3, the IRS expects to see that income on your tax return. The issue lies with the company that sent the 1099, which can't be fixed now. There is no way to report this as "non-taxable" on your return.

To avoid tax on this income, add another 1099-MISC with all the same info, except enter a negative amount for Box 3. This cancels out the income on Line 8.

[jordankjcm]

Thank you!  Though I clearly spelled out the reporting company's error to the CEO, he refuses to change or retract the 1099-MISC for some reason.  Probably gets a tax advantage from reporting that Box 3 amount as "other compensation" paid to me.  Anyway, I tried creating another 1099-MISC with the same information on it regarding payers ID etc, with the amount in Box 3 being a negative amount as the erroneous 1099-MISC issued.  It did not change the amount on 1040 Line 8 one bit!?   Still has a positive number;  it looks like TT just completely ignored the other 1099.  Not sure what to do next.

[PatriciaV · Accepted solution]

Were you able to report the second 1099-MISC as Other Income? Or did it skip to "Do you have another 1099?" You need to check the box for "Other Income" in order to offset the first 1099-MISC.

If you're using TurboTax for Desktop, you can fix this in Forms mode.

1. Open your return and click on the Forms icon in the TurboTax header.
2. Find the second 1099-MISC you entered; click to open in the large window.
3. Under Box 3, check the box for Other Income.
4. Now open Schedule 1 in the large window.
5. Check Line 8, which should be zero (unless you have other 1099-MISC income).
6. You can also open Form 1040 to see if Line 8 is zero.
7. Use Step-by-Step in the header to go back to your return.

[jordankjcm]

PatriciaV,

Yes, it did skip to "Do you have another 1099" question.  But I followed your directions and it worked perfectly!  Now, when I file my amended return (already filed for this year), do I need to make an annotation about why I added a second 1099, showing a negative number?

Thank you very much!

[PatriciaV]

Happy that solution worked for you. No, you don't need to mention anything about the additional 1099-MISC. Note that the IRS only matches the 1099's they do receive. 

Be sure you keep any documentation regarding the tax treatment of this REIT property settlement with your tax documents for this year.

[jordankjcm]

Thank you very much!  You're a life saver (well, a tax saver!!!)