Posts Tagged ‘debt forgiveness’

Have You Had A Debt Forgiven? It Could Be Reportable (Taxable) Income!

Tuesday, February 28th, 2012

The exclusive purpose for the information which is provided from this website is to disseminate information, and not to provide tax advice.

 While there are several different scenarios in which this provision of the tax laws applies, one typical situation occurs when you (A) owe money to a lender (B) and are not able to repay that debt. You don’t meet the requirements for filing under the bankruptcy laws.  B acknowledges the fact that sooner or later you will default or abandon the property (if you have not already done so).  B “forgives” (writes off the unpaid balance or destroys the mortgage note) the unpaid balance of the debt that you owe him/her.  You may now have reportable and taxable income.  The essence of the transaction is that you received something of real value – a forgiven (as in debt elimination) note.  You now longer owe B a dime!!  At the end of the year B writes off the unpaid debt as a “Bad Debt Expense” and issues you a Form 1099 C (“Cancellation of Debt”)    Here is the link to the instructions for this form:  http://www.irs.gov/pub/irs-pdf/i1099ac.pdf   In certain circumstances you may also receive a 1099 A (“Acquisition or Abandonment of Secured Property”).  If you meet the requirements, you may qualify for a partial or total exclusion of the taxable income under the provisions of the “Mortgage Forgiveness Debt Relief Act of 2007” which applies to tax years 2007 – 2012. 

You may need to consult with the Internal Revenue Service, the issuer of the 1099 C, your tax preparer, or a tax attorney.  (more…)