A debt includes any indebtedness whether you are personally liable or 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.
In general, if your debt is canceled, forgiven, or discharged you will receive a Form 1099-C
(PDF), Cancellation of Debt, and must include the canceled amount in gross income
unless you meet an exclusion or exception. If you receive a Form 1099-C but the creditor is continuing to try to collect the debt, the creditor may not have canceled the debt. You should verify with the creditor your specific situation; you might not have cancellation of debt or taxable income.
In general, you must report any taxable amount
of a canceled debt for which you are liable as ordinary income
from the cancellation of debt, on Form 1040
Canceled debts that meet the requirements for any of the following exceptions or exclusions are not taxable.
Debt Cancellations or Reductions that Qualify for EXCEPTION to Inclusion in Gross Income:
1.Amounts specifically excluded from income by law
such as gifts, bequests, devises or inheritances
2.Cancellation of certain qualified student loans
3.Canceled debt, that if it were paid by a cash basis taxpayer, would be deductible
4.A qualified purchase price reduction given by a seller
5.Any Pay-for-Performance Success Payments that reduce the principal balance of your home mortgage under the Home Affordable Modification Program
Canceled Debt that Qualifies for EXCLUSION from Gross Income:
1.Debt canceled in a Title 11 bankruptcy
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
As that is not a principal residence - I might suggest to verify other exemptions or exclusions.
Generally, if you exclude canceled debt from income under one of the exclusions listed above, you must reduce certain tax attributes (certain credits
, losses, basis of assets
, etc.), within limits, by the amount excluded. You must file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment
), to report the amount qualifying for exclusion and any corresponding reduction of those tax attributes.
Let me know if you need any help with reporting