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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10097
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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How do I report a 1099-c forgiveness of debt for a second

Customer Question

how do I report a 1099-c forgiveness of debt for a second residence?The facts are as follows:the house was bought in 2000 for $369,000 and it was foreclosed in 2015. The selling price was $505,000.
The fair market value of the house at the time of the sale was $630,000 and the forgiveness of debt was $211,126.05.I did a research and i get mixed opinions and reviews.
Submitted: 1 month ago.
Category: Tax
Expert:  Lane replied 1 month ago.

Hi Helen,

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You report this (the amount listed in box 2 on the 1099-C as forgiven debt) as income, unless you can exclude under one of the five exceptions:

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See this from IRS:

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EXCLUSIONS from Gross Income:

  1. Debt canceled in a Title 11 bankruptcy case
  2. Debt canceled during insolvency
  3. Cancellation of qualified farm indebtedness
  4. Cancellation of qualified real property business indebtedness
  5. Cancellation of qualified principal residence indebtedness

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The most likely possibility here is insolvency.

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if the fair market value of your assets are less than the balances of you loans outstanding (including the debt before it was forgiven) you are insolvent, and can exclude the income (to the extent of your insolvency)

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As an example, if you total assets were 300,000 and your total debt was 400,000 on the day before the debt was forgiven, then you were insolvent to the extent of $100,000 ... which would allow you to exclude that (only reporting 111,126 of debt forgiveness income in this case)

Expert:  Lane replied 1 month ago.

Please let me know if you have any questions at all, before rating me.

...

And if you DON'T have other questions Your positive rating … (by using those the stars or faces on your screen, and then clicking “submit”) …would be appreciated!

Otherwise I receive no compensation for the work.

...

Thank you,

Lane

...

...

I hold a law degree, with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986

Customer: replied 1 month ago.
Dear Lane,Thank you for your prompt reply. However, I have another question . what about the actual sale of the house? Wouldn't I need to report it in schedule D and record the capital gain (basis 369,000 and selling price 505000). Please let me know.
Expert:  Lane replied 1 month ago.

For the capital gain, you use special rules for foreclosure and deed in lieu.

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The basis, is what it is, but the number used for the "sales price" is determined by whether you have a recourse loan or a non-recourse loan:

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For recourse loans, the figure used as the selling price is the lower of the following two amounts:

  • the outstanding loan balance immediately before the foreclosure minus any debt for which the borrower remains personally liable after the foreclosure; or
  • the fair market value of the property being foreclosed.

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For NON-recourse loans the figure used as the selling price is the outstanding loan balance immediately before the foreclosure. You are considered as selling the house to the lender for full consideration of the outstanding debt.

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Here, you have a recourse loan, becasue the debt is being forgiven.

Expert:  Lane replied 1 month ago.

Please let me know if you have any questions at all, before rating me.

...

And if you DON'T have other questions Your positive rating … (by using those the stars or faces on your screen, and then clicking “submit”) …would be appreciated!

Otherwise I receive no compensation for the work.

...

Thank you,

Lane

Expert:  Lane replied 1 month ago.

Hi,

...

I’m just checking back in to see how things are going.

...

Did my answer help?

If this HAS helped, and you DON’T have other questions … I'd appreciate a positive rating (using the stars or faces on your screen, and then clicking “submit")

...

But again, let me know if you need more on this.

Lane

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