If I sold rental property in a short sale and received a Form 1099-S, how do I report it on my return?
Form 1099-S reports the sale portion of the transaction.
Report the sale of your rental property on Form 4797. The sales price is the gross proceeds you received in giving up the property. That’s the amount that was paid down or paid off, plus any other consideration you received in the transaction.
Compute your gain or loss in the usual way — Sales price minus your adjusted basis in the property. You might have depreciation recapture, and you might be subject to loss limitations depending on the circumstances.
You’ll likely receive a Form 1099-C that reports your lender’s discharge of indebtedness. You’ll receive Form 1099-C when your lender cancels your debt, not necessarily in the same year you receive Form 1099-S. There are separate rules for reporting cancellation of debt and potential income associated with it.