 
PO Box 2214 Oregon City OR 97045 503-656-0699 |
|
|
Date last modified:
10/11/11 |
Forgiveness or Cancellation of Debt Mortgage, Credit Card and other debt
that is forgiven must be reported as "income".
Taxpayers will receive a 1099-C reporting the amount
of debt cancelled.
There are some situations where
the debt will not be considered income but it is the taxpayer’s responsibility
to report this to the IRS. Congress passed legislation to exclude up
to $2 million in “mortgage acquisition” debt, that is mortgage debt used to buy,
build or improve the taxpayer’s primary residence.
Refinanced debt and home equity loans are not
covered by this legislation if the money was used to purchase a car, pay off credit cards, etc.
Only debt secured by the taxpayer's primary residence is eligible
for the exclusion.
Congress has extended this
provision to mortgage debt cancelled before January 1, 2013. The amount of cancelled debt excluded
from income reduces the home’s basis.
The
basis is important because if the house is sold, the taxpayer may have capital
gain from the sale.
In
Debt relief may not be taxable if the taxpayer filed for bankruptcy or can prove insolvency. In both cases, if the taxpayer receives a 1099-C, the figure must be reported on the tax return, zeroed out and an explanation attached to the return. Taxpayers abandoning their residence may receive a 1099-A. This also has to be reported on the tax return. As with cancellation of debt, the taxpayer may have income to recognize and report.
|
