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Form 982 CPA discusses how to exclude Cancelled Debt from Taxable Income | Form 1099-C | Short Sales and Foreclosures

Short sale cpa 982 insolvency accountant

On short sales, cancelled debt becomes taxable income unless you can exclude it through Form 982. (910) 399-2705.

CPAs use Form 982 to exclude cancelled debt from taxable income on Form 1040, or your company’s tax return. All cancelled debt becomes taxable income for the IRS if it can’t be excluded on Form 982. Examples of cancelled debt include:

  • Short sales, where the lender writes off some of your mortgage.
  • Foreclosures, where the lender forgives part of your mortgage.
  • Mortgage loan modifications.
  • Credit card account negotiations, where the credit card company writes off some debt.
  • Car repo, where the bank writes off the balance owed.

Lenders report cancelled debt to both you and the IRS on Form 1099-C.

  • If you received a Form 1099-C for prior tax years and didn’t exclude it via Form 982, consider amending that return.
  • Don’t let cancelled become taxable income without using every possibility on Form 982 to exclude it.
  • If you expect to have cancelled debt in 2012, use the intervening time to optimize your future tax position. 
  • A rough rule of thumb; figure 25% of cancelled debt becomes taxes due unless you can exclude it.
    – Gary Bode, Form 982 CPA and short sale accountant

Short Sales, Form 982, Insolvency and Form 1099-C

Note that Form 1099-A isn’t automatically cancelled debt – there’s lots of confusion about this.

In 2013, so far, short sales are the main cause for receiving a Form 1099-C. On a short sale, you sell your home or rental property for less than the outstanding mortgage balance. When the bank writes off some, or all of the mortgage due, that amount becomes cancelled debt and the IRS taxes you on it. Ouch.  However the IRS allows multiple strategies on Form 982 to exclude cancelled debt from taxable income. Here’s the typical progression of events:

  • You stop making mortgage payments. Millions of folks got stung in the Recession and we’re still seeing lots of it in 2013.
  • Eventually the bank forces you into a short sale. We understand the stress involved.
  • The bank cancels the remaining mortgage balance.
  • The bank sends a Form 1099-C to you and the IRS.
  • The cancelled debt becomes taxable income. Sort of adding insult to injury?
  • You use the Insolvency and/or Real Property Business Debt sections of Form 982 to exclude cancelled debt from taxable income. Yes, you can use more than one part of 982. Another common avenue on Form 982 in Bankruptcy which is different than IRS Insolvency. Some components of Form 982 are “gimmies”, others are tricky.
  • Remember you had a sale of your property. And you’re taxed on the Gain or Loss. This calculation gets a bit complicated with rental property short sales. The accumulated depreciation and past rental property losses factor in.
  • Form 982 requires tricky additional adjustments to your basis in the property. This is the notorious tax attributes section of Form 982.

Sources of Information

  • This site has multiple posts on Form 982, Form 1099-C, foreclosures, short sales, insolvency and cancelled debt. Simply click on the form or category drop down list in the left sidebar.
  • Form 982 instructions.
  • Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.

Note this is a complex area of IRS taxation. You can’t reasonably use these posts alone for tax preparation.

General Form 982 CPA  advice

  • If you have cancelled debt and don’t receive a Form 1099-C, make sure one wasn’t sent to the IRS by your lender. We make it a point to pull IRS transcripts to check. Clients often say they never received it. And then the IRS sends them a Notice CP2000 trying to tax them on the entire amount of cancelled debt.
  • If you receive a Form 1099-A there should be a Form 1099-C in your future.
  • There’s almost always some way on Form 982, to exclude at least part of the cancelled debt from taxable income on Form 1099-C.
  • Double check Form 1099-C accuracy for both date and amount. Both are important. Sometimes we’ll correct it and then back that correction up with supplemental documentation sent along with the return. Careful here; the IRS assumes Form 1099-C is correct.
  • Form 982 calculations use the date of the cancelled debt, not December 31st.
  • Since Form 982 reduces your taxes, the IRS probably scrutinizes it closely. Make sure it is correct.
  • Don’t allow cancelled debt becomes taxable income without exhausting the possibilities on Form 982.

I’m a Form 982 CPA with a virtual office to serve long distance and international clients. We deal with short sales, Form 982 and Form 1099-C routinely. Unfortunately this became a niche for us during the Recession. This website advocates self tax preparation when realistic. If you get uncomfortable with Form 982, consider calling us for a free phone consult, please call (910) 399-2705.

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2 comments to Form 982 CPA discusses how to exclude Cancelled Debt from Taxable Income | Form 1099-C | Short Sales and Foreclosures

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