Client brought a IRS transcript showing a 1099C with the amount of debt canceled as 140,149 and a fair market value of 127,500. What amount should I put on Line 21, do I put the difference? This was from a foreclosure on a home. The taxpayer didn't declare bankruptcy so I'm assuming the amount is taxable. Any help would be greatly appreciated, thanks!
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Be very carefult with this
It's probably not taxable.Originally posted by dmann View Post
First of all, cancelled debt is not taxable if the taxpayer was insolvent at the time the debt was cancelled. If they lost their home in a foreclosure proceeding, they were probably insolvent at that time. The question of insolvency is an empirical fact that can be established on Form 982.
Second, even if they were not insolvent, there was a last minute piece of legislation pushed through that deals with mortgage debt forgiveness that may be applicable to what you are describing.
Burton M. Koss
koss@usakoss.netBurton M. Koss
koss@usakoss.net
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The map is not the territory...
and the instruction book is not the process. -
When was the debt forgiven? If is was for the mortgage on his primary residence he may qualify for the new law that the debt is not reportable.Originally posted by dmann View Post
Cancelled debt is $140,149 and goes on the 1040. You could check if the TP was insolvent at the time of the debt forgiveness in which case it would not be reportable. Form 982 is the form to submit with the return if he was insolvent. Use a 433A to get the information needed to determine insolvency."A man that holds a cat by the tail learns something he can learn no other way." - Mark TwainComment
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Originally posted by dmann View Post
Transcript?????? What year was this for???????This post is for discussion purposes only and should be verified with other sources before actual use.
Many times I post additional info on the post, Click on "message board" for updated content.Comment
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Are you sure it is not a 1099A? What you described appears on a 1099A, not on a 1099C.
If it is a 1099A, it should be handled as a sale on Sch D. But, you have to have all the facts.
The sales price is the FMV listed. The outstanding debt listed is the basis. But, of course, the TP may be able to adjust the basis. They may have added improvements to the property the lender doesn't account for in the outstanding balance. So, the TP may have their own basis.
Then how was the property used. If personal residence, see if they qualify to exclude the gain. (if there is a gain) If there is a loss, then no deduction.
If it was rental property, then you follow the rules for the sales of business property. Be sure to account for any depreciation when figuring the basis.
At this point in the scenario, there is no forgiven debt. A 1099C shows the debt forgiven. It does not show FMV and outstanding debt.Last edited by WhiteOleander; 01-12-2008, 04:27 PM.You have the right to remain silent. Anything you say will be misquoted, then used against you.Comment
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The transcript did in fact showed a 1099C, it had a line that shows the amount of the cancelled debt and another line for the FMV of the property. It was for tax year 2006. Taxpayer said he was having some financial difficulties in that year, and just didn't make the mortgage payments thus the reason for his foreclosure. It was his primary residence. Would the IRS consider the taxpayer insolvent in this case? This client has many tax problems besides this, I may just sent him somewhere else as I don't want to give him wrong information or prepare his prior year returns incorrectly. Anyway, thanks for all your help!Comment
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Why would you send him away?
Between the IRS pubs, this board and TTB this is not that difficult to understand. Our business is all about learning new things. I wouldn't send someone away, especially not for something this simple.Originally posted by dmann View Post
To determine insolvency you need to know how much he had in the bank, plus the FMV of all assets the day before the foreclosure. Then you back out all liabilities (back taxes, mortgage, car notes, personal loans, credit cards, etc.). If the liabilities exceed the assets debt is to be forgiven. Keep at it. We're here to help!Comment
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Form 1099c
Form 1099C can contain the FMV amount as well, in box 7.
Box 7 instructions say that if in the same calendar year, a foreclosure or abandonment of property occurred in connection with the cancellation of the debt, the fair market value of the property will be shown, or you will receive a separate Form 1099-A. Generally the gross foreclosure bid price is considered to be the FMV. For an abandonment or voluntary conveyance in lieu of foreclosre, the FMV is generally the appraised value of the property. See Pub 544, Sales and Other Dispositions of Assets, for information about foreclosures and abandonments.
SandyComment
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