Daily Archives: September 15, 2011

Forgiveness Of Debt Income, What Everyone Ought To Know

DISCLAIMER:  NOTHING IN THIS POST IS MEANT AS TAX ADVICE, CONSULT A PROFESSIONAL

Some of my clients were about to pay income tax because of 1099-C forms received on rental properties they had abandoned.

I was stunned.

These people were bankruptcy clients, who had already filed Chapter 7 and received discharges.

So they no  longer had personal liability on their old debts, but it is NOT income to them.

This had not stopped certain creditors from sending a 1099-C form, stating there was income by virtue of forgiven debt, resulting in income tax liability to my client.

I AM NOT A TAX ADVISER.

But I am certain there is no income from discharge of a debt in bankruptcy.

That is the box to check on IRS form 982 (available at www.IRS.gov):

“1 a Discharge of indebtedness in a title 11 case”

Title 11 is the Bankruptcy Code.

If you filed bankruptcy, and discharged the debt, and you got or get one of these 1099 forms, file the 982 form so the IRS knows that your debt was discharged in bankruptcy.

For reasons that escape me, a notice of every bankruptcy filing is sent to the IRS, so somewhere in there, they know you filed bankruptcy.

The IRS gets a notice whether you list them as a creditor, or not.

What if you did get a 1099-C for forgiveness of debt income, and did NOT file bankruptcy?

Form 982 1 e is for “qualified principal residence indebtedness.”

With the explosion of the real estate bubble, lots of homes are worth less than the mortgages owed on them.

Under President Bush, Congress passed this exception, if your home is foreclosed for $150,000, but you owed $300,000 on it, you do not have $150,000 of debt forgiveness income.

IF you qualify.

This exception is designed to apply to money used to buy or improve your primary residence.

You will not qualify  if you took out a second mortgage to put money into your business or pay credit cards.

Also, if you are insolvent, but have not obtained a bankruptcy discharge, Form 982 (1) b applies.

CONSULT YOUR TAX ADVISER

 

DISCLAIMER:  NOTHING IN THIS POST IS MEANT AS TAX ADVICE, CONSULT A PROFESSIONAL

Forgiveness Of Debt Income, What Everyone Ought To Know