Losing your home is tough, but paying taxes on forgiven or cancelled debt is devastating. Use the insolvency and/or qualified principal residence indebtedness provision of Form 982 to avoid this double whammy. Our virtual office means we can help you regardless of where you live. We offer a free consult on cancelled debt. (910) 399-2705.
Form 982 CPAs are already fielding calls about 2013 Form 1099-C, Cancellation of Debt. One of the main provisions of Form 982, qualified principal residence indebtedness, disappears after 2013. But Congress extended it once. Maybe they’ll do so again. But once the qualified principal residence indebtedness provision expires, only IRS insolvency can exclude cancelled debt on your primary residence from becoming taxable income.
Up to $2,000,000 of cancelled debt can be excluded on Form 982 through the qualified principal residence indebtedness. The main proviso? The cancelled debt must stem from your home’s decrease in value and/or your personal financial condition.
What is IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)?
Your lender reports all cancelled debt on IRS tax Form 1099-C. The amount in Box 2 becomes taxable income if you can’t exclude it through a provision on Form 982. Insolvency and qualified principal residence indebtedness are just two provisions on Form 982. The Form 982 instructions aren’t great but check out IRS Publication 4681.
Form 1099-C, Cancellation of Debt
The IRS assumes Form 1099-C is correct. But:
- Sometimes the date is incorrect.
- Sometimes the amount is incorrect.
- Sometimes the Fair Market Value is incorrect.
It’s generally up to you to get a corrected Form 1099-C. But if these figures don’t work to your advantage, your CPA can make a case for the correct numbers on the tax return.
“Sale” of your home, Form 1099-A, Acquisition or Abandonment of Secured Property and/or Form 1099-C
Form 1099-A informs the IRS your home’s title got transferred to the bank. No debt cancellation stems directly from Form 1099-A. But a subsequent Form 1099-C is likely. Sometimes it goes to the old address and new Clients call because the IRS sends them a Notice CP2000 proposing tax on the entire sale proceeds. Ouch. In this case we’d file an amended tax return to include the Form 1099-A and/or Form 1099-C. Sometimes we pull the IRS account information to be sure.
Foreclosure may not seem like a “sale.” But both IRS Forms 1099-A and 1099-C can trigger a requirement to calculate the gain or loss on the sale of your home. I’ve only seen a few cases where the gain was taxable. Why? Because of the $25,000 exclusion available. But your Form 982 CPA would report the sale to avoid future IRS questions even though no tax consequences exist.
I’ve had a few cases where the IRS received a Form 1099-S, Proceeds From Real Estate Transactions, but the new Client didn’t report it.
“If your home got foreclosed or abandoned make sure to report the “sale” on your tax return, even though no additional tax was due.”
- Gary Bode, insolvency CPA
Can I file Form 982 myself?
Sure. The qualified principal residence indebtedness provision is straight forward. Except for the Reduction of Tax Attributes aspect. The IRS publishes Form 982 instructions and Publication 4681. New clients sometimes come my way because their tax software doesn’t handle all the Form 982 nuances. I got dozens of calls from tax preparers asking for help in 2013. New clients often say their tax preparer doesn’t seem to know much about the tax consequences of debt cancellation. Try it yourself. If you get uncomfortable consider giving us a call at (910) 399-2705. Our virtual office developed from handling cancelled debt and Form 982 for long distance clients. So no worries about long distance tax work.
For 2013, I incorrectly received, at my home address, a 1099-c for an S Corp which filed ch. 11 in 2011. I and the majority shareholder were guarantors of the debt. I called the bank and asked them to send the 1099-c to the majority owner who deals with the CPA to file tax returns for the S Corp. It is unlikely that the majority owner will send the 1099-c to the CPA, so I probably will not receive a K-1. It’s my understanding that I would be responsible for my 10% ownership share of the COD income, not the entire debt and that lenders are not required to send a 1099-c to guarantors. So If I don’t receive a K-1 how should I report my share of the COD income? Should I take it upon myself to send the 1099-c to the CPA and ask him to prepare a tax return and K-1s? Remember that if the 1099-c had been sent to the correct corporate address I would never have known about it.
Thanks.
Hi Bob: having the CPA prepare a 1120-S should be simple and quick. No tax should be due if I understand the situation.