Cancellation Of Debt

[KWF]

Because of a job change, a t/p moves to a new city. He puts his old residence (which he lived in for aprox 4 years) up for sale.
A year after the move, he purchases a new principle residence at his new place of work, but still has not sold his old house, which has remained unoccupied.
If the old mortgage lender forgives the old debt, would that debt still be considered "qualified principle residence indebtedness" and thus be excluded from income?

[erchess]

Ill take a stab

I don't think so since it is not his prinicpal residence at the time of debt forgiveness. Let's see what others think.

[Roland Slugg]

Maybe

One could advance the theory that the "old" home was still the T/P's "main home" until such time as it sold. Since it didn't sell but was given to the bank in a "deed-in-lieu" settlement (at least I think this is what the poster meant), then the exclusion might apply. The IRS might not agree with this theory, but I believe Congress might, given the current political attitude towards people in such predicaments.

According to the letter of the law, but perhaps not its spirit, the income is probably not excludable. However, the IRS might take a more lenient view, given the state of (1) the economy, (2) the housing market, and (3) the jobs market, and allow the loss in this and similar cases. If not, Congress might relax the wording of the law to be more like the "2-out-of-5" year rule for exclusion of gain when you sell your main residence. That is a very sensible rule, and I believe a similar rule "should" apply to the exclusion of COD income in cases like the one in this post ... perhaps adjusted to "if settled within two years after buying a new main residence" or something like that.

I realize this is not a particularly "authoritative" answer to the original post, but it may provide the basis on which to make a persuasive argument.

[Snaggletooth]

Roland

Good to see you back on the board. I've wondered where "Sluggo" has been. Especially when I needed really GOOD answers to questions that dumbfounded me.

Try my multiple choice on my recent post/question...

[AZ-Tax]

TP receives 1099-C on resident mortgage yet TP remains the owner...

I started my own thread with a similar situation then I saw this thread so I thought I would add my situation:

Can this be correct, TP gets about $100K cancelled, remains in the residence and the 1099-C amt avoids taxation thru a loan modification. Part III " Computation of gain or loss from foreclosure, repossession, abandonment, short sale, or other transfer of property" of the worksheet all has to do with the TP vacating the residential home and I would think "loan modification" has to do with the TP remaining in the home yet when I check the loan modificaton box, it generates no taxes on the 1099-C.