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 starting point. However, also be ready to show where the original figures on that worksheet came from.
Brokerage statements, bank statements, prior year W2s, employer retirement plan statements, and tax assessments are all good items to have.
If the client does not have some of their documents you may look at places like the country assessor’s office, real estate offices for comparable sales reports, online search engines like www.zillow.com can help with appraisal value for real property, and other family members records and statements for family property.
You and your client must do your homework properly, especially when dealing with foreclosure and repossession of property. The bank has no need, or desire, to establish the proper FMV of a piece of property it sells after seizure. Normally the FMV blocks on the 1099A and 1099C simply reflect the amount the lender received for the sale of the property.
Considering the statement below:
For recourse loans, the amount of the realized gain is:
the lesser of the debt immediately before the seizure reduced by any amount of the loan the debtor remains liable for after the seizure
the FMV of the property at the time of the seizure.
In light of this, how important is it for you to have an accurate assessment of the client’s adjusted basis and the FMV of the property on the date of seizure rather then accepting the numbers the lender gives you?
How much money can you save your client with proper FMV documentation on the deemed sale of a foreclosed business building, since the gain would go on the Schedule C and be subject to SE tax?
We finish our series tomorrow with Alternatives to Foreclosure.