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Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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118. Tax consequences of 2nd mortgage exrtinguishment. I

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118. Tax consequences of 2nd mortgage exrtinguishment.

I just received an offer from my second mortgage company for the extinguishment of the second mortgage on the primary residence which is in the amount of $140,000.

My concern is that if I accept the offer the I would be responsible for taxes on them.
Please explain the possible tax consequences of accepting the offer.

Would I be better off to file for bankruptcy instead and get rid of this second mortgage. And other pending second mortgages in the amount of $200,000. Those second mortgages are lingering after the corresponding properties were foreclosed in 2008. Those were investment properties.
Hi and welcome to Just Answer!

If you negotiate with the creditor and all or part of the debt is forgiven or the debt would be canceled under bankruptcy protection procedure - you are sent the form 1099-C.

The amount of debt forgiven is reportable on 1099-C - - generally is taxable, unless any exemption apply -- you should file a form 982 -
- to proof your exemption - and might exclude all or part of canceled debt from taxable income.

Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent. A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. The forgiven debt may be excluded as income under the "insolvency" exclusion.


If you are eligible to file for bankruptcy protection - most likely you are insolvent and are eligible to exclude the forgiven debt from taxable income.

Let me know if you need any help.

Customer: replied 5 years ago.
If one 2nd mortgage debt is forgiven and the other 2nd mortgages are not yet forgiven, will the not yet forgiven mortgages count towards insolvancy calculations?

Are the insolvancy calculations basically focused on assets and liabilities or the income is considered in the insolvancy calculations?
Yes it will be counted - you need to determine your insolvency of the day before the debt is forgiven.
Income is not considered for insolvency.
You need to prepare insolvency worksheet - see this publication - - page 6.
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