Forum Rules (Everyone Must Read!!!) (updated: 04/28/2015)

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effect on taxes?

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  • effect on taxes?

    If/when does bankruptcy affect my taxes? At all? Just when the discharge is made? Or does even the creation of the estate at filing have some tax consequence?

    Do the court send relevant tax forms whenever they're needed, or are any needed? After all, the discharged debt isn't a taxable gain of any form, as far as I know.

    I read plenty about if past tax debts can be discharged and what tax documents to send to whom and that kind of stuff, but I can't seem to find much about what bankruptcy does, if anything, to tax returns for the year(s) over which the actual bankruptcy happens.

  • #2
    My understanding, and I'm no tax expert, is that bankruptcy has little effect on your taxes. The one exception might be if you have a deficiency from foreclosure for which received a 1099, the tax code indicates that you have no tax liability provided you were insolvent at the time. Filing bankruptcy is proof of insolvency as far as the IRS is concerned.

    That's how I understand it from my tax professional.
    Case Closed > 2/08/2010


    • #3
      Cool, thanks. I do have a past foreclosure, but it wasn't non-recourse -- I am not aware that any of it was written off and the deficiency from that is mostly why I'm filing now. (Not that I've been able to find out from them how much the deficiency is, despite having written to them multiple times at multiple addresses!) I was certainly insolvent at the time it happened.


      • #4
        We're trying to keep a rental that don't have any equity in. What happens if the trustee decides we need to sell the property? Because of years of depreciation that we've taken, it's inevitable that we will have a gain on the property. Is this gain or the potential capital gain avoided if we are insolvent?

        It would be really bad to go through bankruptcy and to have to sell a property that leaves us with taxes due.
        12/2/09- Filed non-consumer Chp. 7
        1/11/10- 341 Hearing
        1/21/10- Confirmed No Asset
        3/12/10- Discharge date


        • #5
          Originally posted by jjsmith View Post
          We're trying to keep a rental that don't have any equity in. What happens if the trustee decides we need to sell the property? Because of years of depreciation that we've taken, it's inevitable that we will have a gain on the property. Is this gain or the potential capital gain avoided if we are insolvent?

          It would be really bad to go through bankruptcy and to have to sell a property that leaves us with taxes due.
          I'm not sure about that particular set of circumstances. I had a rental property that I bought for $110K, refi'd for $230K, and was recently sold at auction for $85K. My tax advisor indicated that I won't have a tax liability for capital gains or forgiveness of the deficiency balance. Basically this becomes a business loss.

          Now this is all happening before and during my bankruptcy, so I'm not sure how it would work post bankruptcy. If you surrender the property in the bankruptcy, then I think your tax picture would look much like mine, but I'd definitely advise getting a professional opinion on that before making any decision.
          Case Closed > 2/08/2010


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