Thank you for your question. I am happy to assist you.
The 1099 would be for relief of indebtedness income.
You can be taxed on the “debt relief” income. If the lender accepts less than what you owe on the full balance, this difference will become discharge of indebtedness income and it is taxed as “ordinary income” (See 26 U.S.C. § 61 and §§ 1001 through 1016)
I would like to point out some or the common exceptions to the IRS discharge of indebtedness income rule. There may be other exceptions as well. You can determine if any apply to your situation.
1. Debts discharged through bankruptcy are not considered taxable income.
2. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.
3. Personal residence. The Mortgage Forgiveness Debt Relief Act of 2007 excludes from taxation discharges of up to $2 million of indebtedness that is secured by a principal residence and is incurred in the acquisition, construction or substantial improvement of the principal residence. This special relief is available for three years beginning January 1, 2007, and ending December 31, 2009
4. If you are insolvent when the debt is canceled, some or all of the canceled debt may not be taxable to you.
Here is an interesting article that discusses taxation:
I hope that the information which I provided was helpful to you.
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