Did the 2008 housing market crash finally catch up to you, as it did with so many Americans?
If it did, you’re not alone. I’m your witness! During my first 16 years in the trenches of tax accounting – filing tax returns, providing tax planning, and resolving IRS and state tax issues for clients – I prepared only three returns reporting cancellations of debts.
Yes, just three.
But in the last four tax seasons, I’ve filed 12 federal returns with cancellation-of-debt forms, 1099-C and/or 1099-A. I have three more returns scheduled for the current year. Yikes!
This once shameful financial issue has become so common, that many taxpayers now are talking openly with others about their mortgage debt dilemmas and tax issues surrounding them. Taxpayers are searching nervously for solutions to what appear to be very large tax bills.
Some simply will pay Uncle Sam and forget this awful time in their lives. But, in some circumstances, IRS codes do allow taxpayers to exclude at least part of the canceled debt on a mortgage. In short, you might not need merely to write a check to the IRS. A little fact-finding might reduce or eliminate taxation on your debt.
At the same time, this tax issue is complex and daunting! At EricJohn Ltd., we are able to look for the important facts and put them in place on your tax returns. Frankly, in my practice, I’ve found that a majority of clients have very little, if any, tax due.
If you like to self-prepare your return, here are some items you’ll need:
Information required to figure any tax due:
- Effective date for cancellation of debt.
- FMV (Fair Market Value) of the property on the day before cancellation.
- Was the property for personal or business use?
- Was the debt(s) recourse or non-recourse?
- Does a Form 982 exclusion apply? (See below.)
Tax forms you may need to file:
- Form 982 – Reports the amount of canceled debt associated with an exclusion item and any adjustments to the property’s basis.
- Schedule D – Reports taxable gain (or non-allowed loss) on property associated with the canceled debt.
- Form 4797 – Reports gain or loss on business property associated with the canceled debt.
- Form 1040, Line 21 – Reports the taxable portion of the canceled debt.