Debt Cancelled

[Duane Anderson]

New client moved from CA to WA and is in process of divorce, but not final.....Bank forclosed on house with a debt cancelled of $165,000 and was sold for $390,000. Cost of home was $735,000 and client paid $180,000 down.....Is this debt cancelled taxable....Federal and CA?

Thanks,,,,Duane Anderson

[solomon]

New client moved from CA to WA and is in process of divorce, but not final.....Bank forclosed on house with a debt cancelled of $165,000 and was sold for $390,000. Cost of home was $735,000 and client paid $180,000 down.....Is this debt cancelled taxable....Federal and CA?

Thanks,,,,Duane Anderson

Presuming a principal residence, short answer is no - federal. Don't know about CA.

[appelman]

CA conforms now.

If it's really cancellation of debt, you need to do a 982 and claim discharge of qualified principal residence indebtedness. But be careful. If it is original acquisition debt it is probably non-recourse under CA statute. Lenders lie through their teeth. In that case, you might have to do an 8275 and contradict the 1099-C.