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Chad EA, CDFA®, CFP®
Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional
Category: Tax
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Experience:  IRS Licensed Enrolled Agent, CDFA ® CFP ®, MBA
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If a bank issues a 1099c for forgiveness of debt (860k to

Customer Question

If a bank issues a 1099c for forgiveness of debt (860k to 1m) on a property purchased for 1.2 m with 400k in equity and about 200k in improvements, and the bank takes the house, do I owe taxes on the amount of the 1099c, or does the loss of the home and the loss of equity and improvements offset that 1099c?
Submitted: 11 months ago.
Category: Tax
Expert:  Chad EA, CDFA®, CFP® replied 11 months ago.

Welcome to JustAnswer!

My name is ***** ***** you for giving us the opportunity to answer your question for informational purposes only.

The 1099C may meet one of the exclusion from income as outlined below.

Cancellation of debt and 1099- C is discussed in the IRS Topic Number 431-Canceled Debt- Is it taxable or Not

https://www.irs.gov/taxtopics/tc431

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If your debt is forgiven or discharged for less than the full amount you owe, the debt is considered canceled in the amount that you don't have to pay. The law provides several exceptions, however, in which the amount you don't have to pay isn't canceled debt.

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After a debt is canceled, the creditor may send you a Form 1099-C, Cancellation of Debt, showing the amount of cancellation of debt and the date of cancellation, among other things.

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In general, you must report any taxable amount of a canceled debt as ordinary income from the cancellation of debt on Form 1040, U.S. Individual Income Tax Return,

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Caution: If property secured your debt and the creditor takes that property in full or partial satisfaction of your debt, you're treated as having sold that property for the amount of the canceled debt and may have a taxable gain or loss.

The gain or loss on a deemed sale of your property is an issue separate from whether any cancellation of debt income associated with that same property is includable in gross income. See Pub 544, Sales and Other Dispositions of Assets, and Pub 23, Selling Your Home, for detailed information on reporting gain or loss from repossession, foreclosure, or abandonment of property.

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Canceled debt 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
Expert:  Chad EA, CDFA®, CFP® replied 11 months ago.

You must attach to your tax return a 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. For cancellation of qualified principal residence indebtedness that you exclude from income, you must only reduce your basis in your principal residence.

Expert:  Chad EA, CDFA®, CFP® replied 11 months ago.

You may refer to Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonment's (for Individuals), for more detailed information regarding taxability of canceled debt, how to report it, and related exceptions and exclusions.

Expert:  Chad EA, CDFA®, CFP® replied 11 months ago.

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