1099-C with a twist....update

[PFL]

Reference my post about this subject yesterday, I have since gone back to basic black and white. In going through IRS pub 4681 and the instructions for form 982, the only requirements stated are based on "Qualified principal residence indebtedness" (QPRI) and on "principal residence". The residence in question was their main home until they were kicked out, and they originally bought the home in accordance with the requirements under QPRI. I guess my main question becomes, since the bank was required to fix their mortgage lending misdeeds (basically unrelated to tax issues), and the house was returned to the taxpayers, what rule(s) preside; the rules for form 982 and pub 4681, or the rules pertaining to modified mortgages? The taxpayers never expected the house back, in fact, they were completely caught off guard when the letter from the bank arrived. Again, any thoughts? Thanks.

[DaveinTexas]

I've been looking

I've been You are right that the "Qualified Residence" debt mentioned in Section 108 has nothing to do with the 2 out of the 5 year rule as it relates to Section 121. It merely must be the residence the taxpayers spent the greater amount of time in BUT the fact that the home no longer was their Primary Residence for a period of 5 years is the sticking point and the IRS may not budge on that issue.

Once the taxpayer changes their address on the return, change driver's licenses, utility payments, etc (acting as if their primary residence has changed) you may not be able to hang your hat on the debt exclusion.

What you haven't mentioned is whether or not the taxpayers qualify to exclude the debt with the insolvency provision, is this a possibility?

[TaxmannEA]

Is 1099C correct?

I'll throw this in here for what it's worth. It sounds that the bank was forced by the courts to adjust the mortgage balance due to some kind of improper activity on their part. I'm not really sure that his would qualify as debt forgiveness. It sounds more to me like a damage settlement. If that is the case, I wouldn't think that they should call it "debt forgiveness". If that is the case, the adjustment may possibly not be includable in income at all. Am I totally off here?

[taxea]

you need to review all documents that led up to the issuance of this 1099C for proper reporting