NC discharge of qualified principal residence

[Acownt4it]

I am an IL tax preparer and I need some expertise with NC.
My client lived in IL and moved to NC in 2012 for a new job. He put his IL principal residence on the market in 2012 before his move. This house was a short-sale in Nov 2013 and there is a $341,000 1099-C issued. I know NC does not conform to the federal provision to allow the exclusion however is there an exception for an out of state residence? It doesn't seem right that NC can gain $55k in taxes for an IL short sale. Any help would be greatly appreciated.

[Alfred]

While not knowledgeable specifically on NC, most software that handles states know how to carry infor from Fed forms to the State. For Federal there are different means to avoid taxation on the 1099-C debt forgiveness for sale of Personal Residence. First, the IRS allows waiver of Debt Forgiveness income for Pers. Residence. If that does not work for you, then the option of determining if the Debt Forgiveness can be excluded bases on Insolvency just prior to the sale (i.e. Debts exceeded Assets). Finally, if TP was married, the $500,000 gain exclusion for Pers Residence can also crate a non-taxable situation for the Feds. Once you have nothing on the Federal Forms, you end up carrying nothing to the NC State Forms. Last but not least is the option of doing an IL non-res return for the sale, and excluding it from the NC taxes for having been declared in IL.

[JohnH]

Your client's dilemma is a very troubling situation. I've never encountered something like this in NC, but doing a quick search I can't find a way for you to claim an exception. He is a NC resident who has income in another state. NC will charge him tax on what they consider to be income, even if the Federal and IL do not, and in this case the Fed-to-NC adjustment is horrendous.

While he could claim a credit on the NC return for all or part of any tax he paid IL, in this case I assume that IL follows the Federal rules to exclude the income. I agree that is is extremely unfair. You probably need to contact the NC Dept of Revenue to ask if there is any relief in this situation, but I'm not hopeful you are going to get a favorable response.

I think your estimate of the tax liability is high - I think it would be more like $26K, but still a lot of money. Also, just wondering if this could be treated as a sale of principal residence with appropriate basis adjustments. Kinda busy today, so my thinking may be off base - but just a thought to brainstorm.

[Acownt4it]

going to call

JohnH thank you for your insight, your insight is spot on. IL does follow federal rules for the discharge of debt that is why this took me by surprise with NC. I will call NCDOR tomorrow and see if there is something I can do with this. I will let you know what I find out.
Thanks again.

[Gary2]

Let me highlight one of Alfred's points, which is that if the insolvency exclusion can apply, you can choose that on the federal, and then that exclusion will, as far as I know, also apply to NC.