| The year 2009 was ground shattering for the housing | | | | debt cancelled the actual purchase price is used. Again, |
| market. The foreclosures in the country continued to | | | | if it is about your primary residence, it is excluded from |
| increase exponentially and many lenders went out of | | | | income (form 982 has to be prepared). |
| business. The government tried unsuccessfully to | | | | 3. If the debt cancelled was a business debt (for |
| stabilize the crisis by giving money to the lenders | | | | example rental property), then the loss of the property |
| (instead to help homeowners). Many taxpayers will be | | | | results in a "sale". Therefore gain or loss has to be |
| receiving 1099-C tax forms if they went through | | | | calculated. Make sure you find an experienced tax |
| foreclosure or short sale. The fact that the lender is | | | | professional who knows how to handle cancellation of |
| sending those 1099 forms means that they are not | | | | debt. |
| going to pursue a deficiency judgment. This is good | | | | 4. Income from the cancellation of debt is excludable |
| news. Usually, the amount of debt cancelled is | | | | for an insolvent buyer to the extend that the liabilities |
| considered an income. However, there are exceptions. | | | | exceed the FMV of their assets. In plain English this |
| 1. If your home has been foreclosed on, box 2 of | | | | means that if you have more debt than assets, you |
| 1099-C will show the amount of debt forgiven. Usually, | | | | have the right to exclude a certain amount from your |
| at the sheriff's sale, your lender buys the house back | | | | income. For example, if you have debt cancelled of |
| and it becomes an REO (real estate owned). The | | | | $100,000. Your liabilities are $180,000 and your assets |
| intention of the Bank is to sell the house as soon as | | | | are $150,000. Your insolvency is for $30,000. |
| possible, but sometimes it takes many months to get | | | | Therefore, instead of reporting $100,000 as an income, |
| rid of it. The good news is that your amount of debt | | | | you will report $70,000 only. |
| cancelled is based on the fair market value of the | | | | 5. Very important. Sometimes, if you are married and |
| house (box 7 of 1099-C). This is important: the | | | | you are both on the deed, you can receive two |
| difference between the FMV and the loan amount is | | | | 1099-C forms for the full amount of debt cancelled |
| what matters to you and shows in box 2. However, if | | | | (instead of one form with both names on it). Point out |
| it is a primary residence, according to The Mortgage | | | | this fact to the tax preparer. You don't want the |
| Debt Relief Act of 2007, the amount of debt cancelled | | | | amount in box 2 to be reported twice. |
| is excluded from the income. | | | | 6. Income from the cancellation of debt is fully |
| 2. If you had a short sale, which means that your | | | | excludable if the debt is discharged in bankruptcy. |
| home has been sold at a discount (with your lender's | | | | This information is just to help you understand that |
| approval), you will still receive 1099-C. The only | | | | foreclosures and short sales have tax consequences. |
| difference in this case is that in order to calculate the | | | | This is again about knowing how to play the game. |