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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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How do I file a debt that was not cancelled with the IRS?

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Customer: replied 9 years ago.

I received a Form 1099-A from my mortgage company for my principle residence home that I could no longer make payments on (abandoned), and it included the outstanding principal balance and FMV. This debt is not cancelled because I did not receive a 1099-C. How do I properly file this with the IRS?

Dear Customer,

what did your CPA say?

The 1099-A has a FMV or sale price on it in one of the blocks. If the FMV of the home is more than the remaining debt, then you do not report this as income, but you may have to determine capital gain on schedule D. You would be entitled to take any capital gains exclusions, which generally are 250,000 of capital gain excluded from tax if you owned and lived in the home as your primary residence for two of the past five years (500,000 if filing a joint return). Since this is lost because you could no longer pay the mortgage, then the IRS allows a reduced capital gains exclusion if you lived in the home and owned it less than two years. Most likely this means you will not have to pay any tax .

If hte FMV or sale price of the home is less than the debt,then it is reported as taxable income.

Customer: replied 9 years ago.

Thank you for your response. Now I have two different answers to my question. The CPA I consulted said, "This information needs to be reported on your tax return. Under the "Mortgage Forgiveness Debt Relief Act of 2007," the amount of forgiven debt is not taxable income if the debt was acquisition debt (incurred to purchase a home), and the home qualified as your primary residence. If you qualify to exclude the forgiven debt, file Form 982 with your tax return. If you do not qualify, you should report the forgiven debt on line 21 as "Other Income."
It's a bit confusing when I looked at Form 982. Then you are mentioning Schedule D, which I had looked at previous from the information I got off the IRS website. Which is correct? I am trying to file my taxes properly without the CPA doing it for me. I am an accountant, but do not specialize in taxes. The FMV is $134,000 and the debt is $121,000, thus I have no income? Which is the correct form to file this information, and do I file the $121,000 amount or both? I usually complete my tax return on Turbo Tax. Does Turbo Tax allow you to file this information along with your 1040? If I comfortable that your answer provides me with the proper IRS treatment, then I would love to make another donation to you, just let me know how.

Thank you very much.

Thank you for asking for additional information. My answer did not cover the circumstances of getting forgiveness because that was not included in your question.

But the Form 982 is used to reduce the attributes in order to seek forgiveness of taxes owed as a result of debt forgiveness. The IRS, under the act, is permitted to forgive taxes.

However, the basis is by adjusting the attributes of the property based on the amount of your liquidity, sometimes called insolvency. The amount of your insolvency IF ANY, determines the adjusted attributes which can in effect result in less taxes owed, zero taxes owed, or no change.

The Schedule D I mentioned was for the condition that you would have a capital gain. Where there is no debt forgiveness because your property sold for sufficient income to pay off your debt. In this circumstances you would not be counting any forgiveness of debt as income, because there would be no debt forgiveness. Debt forgiveness only happens in the property did not bring in enough money to pay off the debt.

From 982 is only used when you have forgiven debt, and you seek tax abatement for the taxes on the forgiven debt. Every 1099-A does not have forgiven debt. Some 1099-A's reflect capital gains. Two different situations.

So tell me this: Was there enough money from the sale of the home, to pay off the debt?

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Customer: replied 9 years ago.

As far as I know, the home was taken over by the bank in May 2007 and has not been sold. The bank has not given me any correspondence since. If I have received the 1099-A from the bank, does that mean they have sold the home or should I just try and contact the bank to find out? How do I know from the 1009-A that I have debt forgiveness? Is there any other information that needs to be given to determine which form I need to complete?

Block two has the amount of the loan.

Block 4 is the fair market value most generally the price at which the property was sold.

If Block 4 is greater than or equal to Block two, then there is no debt right off.

If Block 4 is less than block two, then you have a right off situation.

Ed Johnson and other Tax Specialists are ready to help you