701—301.8(422) State income tax limited to taxpayer’s net worth immediately before the distressed sale. Taxpayers whose net incomes include gains or losses from distressed sales may limit their state income tax liabilities for the tax years in which the distress sales occurred to their net worths immediately before the distressed sales. The state income tax liability of a taxpayer is the aggregate of the taxpayer’s income tax plus the taxpayer’s minimum tax plus the taxpayer’s lump-sum tax. For purposes of this provision, a distressed sale is the forfeiture of an installment real estate contract, the transfer of real or personal property securing a debt to a creditor in cancellation of that debt, or from the sale or exchange of property as a result of actual notice of foreclosure. Proof of forfeiture of the installment real estate contract, proof of transfer of property to a creditor in cancellation of a debt, or a copy of the notice of foreclosure will constitute documentation of the distressed sale and must be made a part of the return. A copy of the balance sheet showing the taxpayer’s net worth immediately before the distressed sale must also be provided with the return.
The balance sheet supporting the taxpayer’s net worth must include the taxpayer’s personal assets and liabilities as well as the assets of the taxpayer’s farm or other business. In the case of married taxpayers, except in the case of a husband and wife who lived apart at all times during the tax year, the assets and liabilities of both spouses must be considered in determining the taxpayers’ net worth immediately before the distressed sale.
This rule is intended to implement Iowa Code section 422.5.
[Editorial change: IAC Supplement 11/2/22]