Hey guys.. Didn't get too good a news from my cpa this week... so thought I'd run it by here and get some opinions.
My case - File ch7 in 2011, dicharged in May, the case was closed in January 2012. Included all cc debts, first mtg and mtg on rental property.
For 2011 tax year, I filed my regular tax thinking since the case was closed in 2012. So for 2012 tax year, I told my cpa about my filings and she came back with this.
For my rental property (considered a business) - I have to reduce the cost basis on the home by the discharged debt. (the entire mortgage). Since reducing the cost basis by that amount I now have a zero basis. Here's what blew me away --- my cpa said that since I have a 0 basis, if I sell that house for whatever $$$$, all of that could be taxable, since I have no basis. If I sell for 100k, then that is fully taxable as a GAIN.
It just doesn't make sense to me. I am personally free and clear from all debts and the bank still has a lien on the house. If I sell it all the proceeds go to the bank to recover their principal. I understand if I sell ABOVE the loan balance, the bank takes their $$ and the rest comes to me as my gain. This sounds more reasonable... But this is NOT what the cpa is saying.
That just doesn't make sense to me. Can someone with some knowledge or experience please chime in, give me some suggestions or shed some light on this issue?
That's too complicated for my poor little brain. Its not making sense to me either. Have you considered getting a second opinion?
Yes, this is exactly what I understand from IRS document 908.
I'm not a tax person, but if I understand this document it means that you no longer get your basis, the entire sale price is taxable