Gary Bode, CPA: if you need help with Form 982, call us for a free initial phone consult at 399-2705.
IRS Form 982 has various uses, all pertaining to cancelled debt of some type. Any amount of Cancelled Debt becomes taxable income on Form 1040, unless you can exclude it via Form 982. This post discusses the Mortgage Forgiveness Debt Relief Act provision of Form 982 (line 1e), which is available to taxpayers through 2012.
Form 982 Part I, General Information
The term Short Sales commonly refers to selling a personal residence for less than what you owed in mortgage(s). Foreclosure refers to the lender repossessing your home. Only Line 1e and Line 2 of Part I, GENERALLY, need to be completed in these cases. Form 982 can appear simplistic, but you shouldn’t just rely on this post alone to complete it. Tax consequences of Form 982 are so great, and the issues complex enough, that a professional CPA or tax attorney consult may be prudent. The external calculation of Line 2 has some wrinkles.
Form 982, Part II
A third scenario exists; your loan is re-structured IE you keep your home but the lender forgives some amount of debt. Here, Line 10b needs a figure. Again, this Form 982 calculation can be complex and subject to multiple IRS parameters. A professional consult is prudent.
The Difference between Form 1099-A and 1099-C?
Form 1099-A is sent when the lender has re-sold your house after foreclosure. Generally, 1099-A is used to help ascertain your capital gains from the sale. Why? Because if the lender forgave any debt, just a 1099-C (Cancellation of Debt) is issued.
Other Uses of IRS Form 982
- Bankuptcy (Title 11).
- Insolvency. Please see our post on Form 982 Insolvency.
- Farm Debt.
- Real Property Indebtedness.
It pays to read IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.
If you are familiar with this website, you know we advocate self preparation of tax returns whenever reasonable. But Form 982 and 1099-C may lie outside your zone of comfort. The IRS does a good a nice job with their documentation for Form 982, but it involves complex issues. If you’d like help, we offer a free initial consult with a CPA. Just call (910) 399-2705.
Ignorance is not Bliss
Some lenders, especially in credit card debt cancellation, pull a nasty trick and only send 1099-C to the IRS. Your copy gets lost in the mail. So, you prepare Form 1040 without the 1099-C. This eventually results in an IRS audit. Here, you would probably file an amended return, Form 1040-X and still use Form 982 to exclude the cancelled debt. But it is easier and more cost effective to file Form 982 with the original return.
10 facts that the IRS wants you to know about Mortgage Debt Forgiveness.
1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act (available through 2012) , you may be able to exclude up to $2 million of debt forgiven on your principal residence.
2. The limit is $1 million for a married person filing a separate return.
3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.
9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.
