Tiago Splitter wrote:echooo23 wrote:1. Discharge of indebtedness is gross income - §61(a)(12)
Correctechooo23 wrote:2. Discharge of tax liability (such as a gift tax) when property is transferred to another is gross income - Diedrich
Didn't read this case but yes if you owe a debt and someone pays it for you you have received income. Known as the Old Colony Rule. But keep in mind that discharge of indebtedness only happens if there is a lender who doesn't get paid back. If someone pays your lender for you, that isn't considered discharge of indebtedness. Regardless, it's still income.echooo23 wrote:3. Discharge of indebtedness when property is transferred to another is gross income, even where property is subject to depreciation and even where property is valued less than the amount of debt owed - Crane/Tufts:
a. If debt is nonrecourse, 1) include amount of debt into basis, 2) adjust basis by amount of depreciation taken, if any, 3) calculate amount realized by adding amount of debt relief and any other consideration, and 4) calculate gain/loss by taking amount realized and subtracting adjusted basis. So, if A buys Blackacre for $200,000 using $50,000 cash and $150,000 nonrecourse debt, takes $70,000 of depreciation deductions, and then sells Blackacre for $10,000 and assumption of debt. Then, 1) basis equals $50,000 cash investment + $150,000 nonrecourse debt = $200,000; 2) adjusted basis = $200,000 less $70,000 depreciation = $130,000; 3) amount realized = $150,000 debt relief + $10,000 cash consideration = $160,000; 4) Gain = $160,000 amount realized less $130,000 adjusted basis = $30,000
b. If debt is recourse, use bifurcated approach. WHAT IS THE BIFURCATED APPROACH?!?!?!?!
You have nonrecourse right. Just take the amount forgiven, subtract basis, and you have your amount realized. If this is negative, the taxpayer has a nondeductible personal loss. We call that "The Real Estate Bubble."
The bifurcated approach means you have two separated transactions: A disposition of property and taxable forgiveness of debt. Example: Buy a 200k house using 50k plus 150k recourse loan. Loan gets forgiven with no payments being made, house gets sold for 225k. You have a 25k gain on the house, and 150k of income from discharge of indebtedness. This makes intuitive sense; you put in 50k and got 225k at the end, so you should be considered to have 175k of income. "Bifurcated" just makes it sound more complicated
+1. You can also check 1.1001-(2)(a)(2) (stating that amount realized on a property that secures a recourse liability does not include DoD income from 61(a)(12)).