Cancellation of Debt

[S T]

I have a client that might have a cancellation of debt in 2009 on their personal residence as they refinanced and received cash back in excess of acquistion debt and the $100K equity debt. None of the proceeds were used for improvements on the personal residence.

The taxpayer has two other investment properties that were inherited in 2008 so there is a step up basis on those. If the taxpayer sells those properties in 2009, which would produce a loss due to the decline in real estate value even factoring in the depreciation, will those losses offset the cancellation of debt that might have to be included as income?

Trying to find a way to reduce the cancellation of debt which projects out to be more than $100K.

Any thoughts?

Sandy

[Lion]

Exclude?

I haven't had to do a COD on a personal residence -- yet. But, don't we get to exclude up to some high amount like $2,000,000 when it's a personal residence?

[snowbird]

See Page 14-10 Deluxe Edition TTB. Exclusion for Discharge of Debt on Principa Residence. Form 982

[S T]

Cancellation of Debt Exclusion

Thanks Lion, I found that, but somehow, I am thinking my taxpayer won't qualify for a good portion of the cancellation.

What does exclusion of income mean?
Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?
No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing
separately.

Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?
Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681.

This taxpayer has in excess of the acquistion debt loan balance prior to refinancing and $100K equity debt.

Thoughts on how to reduce the cancellation of debt that I am thinking will be income to be reported. I also don't think they will be qualified to use form 982 insolvency, at least not for all of the amount. That is why I was inquiring whether or not any part of the other two properties that will produce a loss might offset the cancellation of debt.

Sandy

[Gene V]

Sandy,
Have you tried Tax Tools worksheet on cancellation of debt? If so, is it helpful?
I haven’t had a client with COD yet. If I do, I was going to try the worksheet in
Tax Tools.

Gene

[S T]

Worksheet

Thanks Gene,

I am going to try that as soon as I can receive some additional information from the client. I have some information, but not accurate, I am sure. So advising the client that it is in their best interest to "dig" through their records.
OMG this is a lot of work, and I probably can't even charge enough for it

Sandy