Documentation –

As with all things dealing with income taxes documentation is a must. Since you are dealing with personal, business, and investment use property it is imperative that you have good documentation for all figures you use in your calculations. The exclusion of CODI and the lack of claiming a taxable gain on the proper forms is one of the “high risk” audit items at the IRS.

When dealing with your business and investment items you need the same type of documentation that you would use to determine basis for disposition. If the item has been in service and has been depreciated, a copy of the current depreciation worksheets are a great Read More

More about John and Reporting Foreclosures –

There is also a good possibility of John having income related to the Cancellation of Debt (CODI). This is a separate transaction and calculation from the gain or loss on the deemed sale of the property. See the worksheet below for a quick example of how the two transactions are separate, yet, related to each other. John purchased the car for $25,000. The FMV when seized was $10,000 and the outstanding loan balance was $22,000.

Worksheet for Foreclosures and Repossessions

Part 1. Figure income from cancellation of debt. (Note: If not personally liable for the debt, there is no income from cancellation of debt. Skip Part 1 and go to Part 2. Read More