Can I claim a net operating loss if I send out a debt cancellation for foreclosed home repairs?

Can I claim a net operating loss if I send out a debt cancellation for foreclosed home repairs?

by James S. Anderson, CPA | Oct 31, 2017

I did repairs for a bank on a foreclosed home. I never got paid for the work. The property sold. There are many owners, none of which will assume liability for the debt. I'm going to cancel the debt, about $100,000. If there are 10 joint owners, I plan to send each of them a 1099-C. On Form 1096, I will say 10 forms, total $100,000. My question is, can I then claim a $100,000 net operating loss since I sent out $100,000 in debt cancellation?

Generally, 1099-C’s are issued only by financial institutions or entities in the business of loaning money. The fact pattern described in the question is an issue of uncollected invoice as opposed to debt cancellation. It appears that you were hired by the bank to perform the repairs. Why they did not pay you is unclear. There is nothing in your question that would lead me to believe the purchasers of the property had any liability in this transaction. Be that as it may, if you are a cash-basis taxpayer, there is no deduction for the uncollected $100,000 invoice since this revenue was never included as income (you would only include in income when actually received). If you are an accrual-basis taxpayer and you included this $100,000 in income when you sent the invoice to the bank, you may deduct the $100,000 as a bad debt. 

This is a complex topic. I suggest you sit down with a CPA in person to help you go over all the details and develop an appropriate solution.
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Answered by: James S. Anderson, CPA, is with Campbell, Rappold & Yurasits LLP in Allentown, Pa.
The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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