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First we need to get the concept of creditor/debtor straight so we are speaking the same language and avoid confusion and misunderstanding.
A creditor is any party to whom money is owed. A debtor is the party owing the money. Thus, for example, if you borrow money from a bank to purchase an automobile the bank is the creditor and you are the debtor.
Form 1099C is issued by a creditor to a debtor when an obligation of the debtor to the creditor is canceled or forgiven. With certain exclusions being permitted by law, the debtor must reflect the cancellation of debt on his/her tax return. This is done on Federal form 1040, line 21 (of the debtor)and not on the debtor's Schedule C. The creditor does not recognize an income from this but does recognize a business loss to the extent of the amount of the obligation which is forgiven. Here is a bit of information on this from the IRS. You can read more about this at the IRS web site www.irs since there are specific rules pertaining to home mortgage forgiveness, business debt forgiveness and other forgiven debts.
Topic 431 - Canceled Debt - Is it
Taxable or Not?
In general, if you are liable for a debt that is canceled, forgiven, or
discharged, you must include the canceled amount in gross income unless you meet
an exclusion or exception. However, canceled or forgiven debt is not considered
income if it is intended as a gift or bequest.
A debt includes any indebtedness for which you are personally liable or for
which you are liable only to the extent of the property securing the debt.
Cancellation of all or part of a debt that is secured by property may occur
because of a foreclosure, a repossession, a voluntary return of the property to
the lender, abandonment of the property, or a principal residence loan
modification. You must report any taxable amount of a debt that is canceled, as
ordinary income from the cancellation of debt, on Form 1040 or Form 1040NR and
associated sub-schedules, as advised in IRS Publication 4681, Canceled Debts,
Foreclosures, Repossessions, and Abandonments (for Individuals).
your debt is secured by property and that property is taken by the lender in
full or partial satisfaction of your debt, you will be treated as having sold
that property and may have a reportable gain or loss. The gain or loss on such a
deemed sale of your property is a separate issue from whether any canceled debt
also associated with that same property is includable in gross income. See IRS
Publication 544, Sales and Other
Dispositions of Assets, for detailed information on reporting gain or
loss from repossession, foreclosure or abandonment of property.
If a federal government agency or an applicable financial entity cancels or
forgives a debt you owe of $600 or more, you should receive a Form 1099-C (PDF), Cancellation of
Debt, showing amounts and other information relating to the
cancellation. The amount of canceled debt is shown in Box 2 of the form.
Taxpayers may also receive a Form 1099-A
(PDF), Acquisition or
Abandonment of Secured Property.
Canceled Debts that meet the requirements for any of the following exceptions
or exclusions are not taxable.
that Qualifies for Exception to Inclusion in Gross Income:
- Amounts specifically excluded from income by law such as gifts or bequests
- Cancellation of certain qualified student loans
- Canceled debt that if paid by a cash basis taxpayer is otherwise deductible
- A qualified purchase price reduction given by a seller
that Qualifies for Exclusion from Gross Income:
- Cancellation of qualified principal residence indebtedness
- Debt canceled in a Title 11 bankruptcy case
- Debt canceled due to insolvency
- Cancellation of qualified farm indebtedness
- Cancellation of qualified real property business indebtedness
The exclusion for "qualified principal residence indebtedness," provides
canceled debt tax relief for many American home owners involved in the mortgage
foreclosure crisis currently affecting much of the country. The exclusion allows
taxpayers to exclude up to $2,000,000 ($1,000,000 if married filing separately)
of "qualified principal residence indebtedness".
Generally, if you exclude canceled debt from income under one of the
exclusions listed above, you must also reduce your tax attributes (certain
credits, losses, and basis of assets) by the amount excluded. You must file Form 982 (PDF), Reduction of Tax
Attributes Due to Discharge of Indebtedness (and Section 1082 Basis
Adjustment), to report the exclusion and the corresponding reduction of
certain tax attributes.
Refer to Publication
4681, Canceled Debts,
Foreclosures, Repossessions, and Abandonments (for Individuals), for
more detailed information regarding taxability of canceled debt, how to report
it, and related exceptions and exclusions. Additional information can also be
found in Publication 525, Taxable and