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Insolvency CPA discusses Short Sales, Insolvency, IRS Form 982, and Form 1099-C

Short Sales, insolvency and Form 982 discussed by a Wilmington NC CPA firm

Gary Bode, CPA: if you’d like a free initial phone consult on Form 982 or insolvency, please call us at 399-2705.

Short Sales are still common secondary to the recession.  Short Sale just means you sell your home or rental property for less than the amount of your outstanding mortgage(s).  Some folks call this situation “upside down”.  Often, the owner gets the bank to write off or cancel the remaining debt.  Your lender then sends you, and the IRS, a Form 1099-C (Cancellation of Debt) reporting this amount in Box 2.  The IRS automatically considers the amount shown on Form 1099-C taxable income.  This may seem strange since you didn’t actually receive money.  But you may be able to exclude some of cancelled debt by filing Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness and Section 1082 Basis Adjustment) and attaching it to your Form 1040 return.

You Probably Don’t need an Insolvency CPA if the short sale was for your primary residence

The exclusion is a “gimme”, and Form 982 is easily self-prepared under these circumstances. A Capital Gain is possible with a primary residence short sale but, usually, that is excluded elsewhere in Form 1040.

You might need an Insolvency CPA if the short sale was for rental property

Here the exclusion of Form 1099-C cancelled debt isn’t automatic and Form 982 preparation becomes complex. The basis of the rental property also needs adjusting for the short sale. That’s the tax attributes part of Form 982. Call us at (910) 399-2705 if you need help. Our virtual office makes it easy and convenient for us to prepare your taxes regardless of your location. If you like what you read, don’t let distance alone dissuade you.

Publication 4681: Canceled Debts, Foreclosures, Repossessions, and Abandonments (For Individuals)

Read Publication 4681 on the IRS website. While we advocate folks self preparing tax returns, Short Sales and insolvency is tricky. Although Form 982 is well delineated in Publication 4681, it seems to me most folks have trouble following it without some tax training or accounting experience.

Foreclosures vs. Short Sales

Foreclosure isn’t different than a Short Sale for Form 1099-C cancelled debt and Form 982 purposes. Again, exclusion of cancelled debt is a gimme for a foreclosure on your primary residence. For rental property you need to use the insolvency components of Form 982.

Form 1099-C Considerations before using the insolvency Component of Form 982

  • Verify the amount in Box 2.
  • For Short Sales, the cancellation date is also important.  Lenders sometimes default to December 31st which could cut the amount of your insolvency cancelled debt exclusion on Form 982.
  • Finally some creditors seem vengeful and only send the IRS a copy of the 1099-C.  If you think you should have gotten a 1099-C, but didn’t receive one, check it out.

Form 1099-S

Form 1099-S reports your real estate sale to the IRS. Sometimes a client needs to amend an earlier tax return because they forgot about the real estate sale and only concentrated on Form 1099-C and excluding the cancelled debt through insolvency on Form 982. If you had a short sale, the IRS probably got a Form 1099-S even if you didn’t.

Form 982 Insolvency Exclusion and Form 1040 Logistics

The cancelled debt from Form 1099-C show up on line 7 of Form 1040. The insolvency exclusion from Form 982 shows up as a negative number on line 21 of Form 1040.

If you throw up your hands after reading Publication 4681 and decide you need some help preparing Form 982 using the Insolvency exclusion on your Short Sale, please consider calling us for a gratis initial phone consult at (910) 399-2705.  While we’re a Wilmington NC CPA firm, we serve a wider geographical base through our virtual office. Please read some of our other posts on cancelled debt and Form 982 to help ascertain our ability and proactive philosophy.

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