Discharge (or Cancellation) of Debt (Part 4 of 4)

Discharge (or Cancellation) of Debt (Part 4 of 4)

The Other 4 Exceptions to the Discharge of Debt as Gross Income

Qualified Real Property Debt.  IRC § 108(a)(1)(D) and (c) allows a non-corporate taxpayer to elect to exclude income arising from the “cancellation of qualified real property business debt.”  The taxpayer must reduce the basis of depreciable real property by the amount excluded. IRC §108(c)(1)(A). Treas. Reg. § 1.1017-1(c) provides rules to reduce first the basis of the qualifying real property and then to other real property held by the taxpayer in a trade/business. IRC § 108(c)(2)(A) limits the exclusion to the amount by which the outstanding principal amount of debt before the cancellation exceeds the current market value minus the principal amount of any other qualified real property debt secured by the property.  The debt must have been used to acquire, construct, reconstruct, or substantially improve the real property. IRC §108(c)(4). The taxpayer must file IRS Form 982 with his/her tax return for the calendar year in which the discharge occurs (identifiable event). IRC §108(d)(9)(A).

Insolvency.  No income is include in the taxpayer’s income by reason of cancellation to debt to the extent the taxpayer is insolvent. IRC § 108(a) (3).  Insolvent means that at the time of the debt forgiveness the taxpayer’s liabilities exceeded the fair market value of the taxpayer’s assets. The amount excluded from income by reason of insolvency cannot exceed the amount by which the taxpayer is insolvent. A taxpayer made solvent by the debt forgiveness recognizes income only to the extent the taxpayer is made solvent. IRC §108(d) (3).

Debt Discharged in Qualified Farm Indebtedness.  See IRC § 108(a)(g).

Debt Discharged in Bankruptcy. See IRC § 108(a)(1)(A).

Please call Arlington Heights Lawyer, Robert S. Thomas if you have received a 1099 (c) or a 1099 (a) after experiencing a short-sale, foreclosure, or loan modification on your primary house.

LAW OFFICE OF ROBERT S THOMAS

1655 N Arlington Heights Rd, Suite 300West

Arlington Heights IL 60004

847-392-5893 phone
info@attorneyrobertthomas.com

For any questions or concerns, please feel free to contact the law office of Arlington Heights attorney Robert S. Thomas.  To read Discharge of Debt part one, two or three click on each link.

Discharge (or Cancellation) of Debt (Part 3 of 4)

Discharge (or Cancellation) of Debt (Part 3 of 4)

IRS Form 1099-C and 1099-A

If a lender issues the taxpayer either an IRS Form 1099-C or an IRS Form 1099-A, please contact Arlington Heights Attorney, Robert S. Thomas so the proper procedures are taken to relieve you of your tax burden.

            IRS Form 1099-C is used by a lender to report a cancellation of debt income to both the IRS and to the taxpayer. 

            It is common for lenders to wait and issue a 1099-C years after the year of forgiveness (i.e.: Identifiable Event).  The taxpayer must contact both the IRS and the lender and ask the lender to issue a 1099-C that reverses or corrects the previous 1099-C. 

            If the taxpayer receives a 1099-C in the year of the identifiable event, the taxpayer still must contact the lender and inform the IRS of the same.

            The taxpayer must file IRS Form 982 in the year the debt is forgiven by a commercial lender.

The taxpayer must include with IRS Form 982 the taxpayer’s letters to both the lender and the IRS and the IRS Form 1099-C.

            If the lender issues an IRS Form 1099-A, the lender is telling the IRS of the lender’s acquisition of an interest in the secured property in full or partial satisfaction of a debt or the abandonment of the secured property. 

This is different from “Forgiveness of Debt.” However, do not ignore the 1099-A.

For any questions or concerns, please feel free to contact the law office of Arlington Heights attorney Robert S. Thomas.  To read Discharge of Debt part one, two or four click on each link.

Discharge (or Cancellation) of Debt (Part 2 of 4)

Discharge (or Cancellation) of Debt (Part 2 of 4)

What is a Qualified Principal Residence?

Arlington Heights Lawyer, Robert S. Thomas explains the Mortgage Debt Forgiveness Act looks to IRC § 121 for the definition of a Principal Residence as:

1. The property must have been both “owned and used” as the taxpayer’s principal residence for periods aggregating 2 or more years.  Treas. Reg. § 1.121 -1(a);

2.  The principal residence does not have to be located in the United States. Treas. Reg. § 1.121-1;

3.  If the taxpayer alternates between two properties, the primary residence will be the property used a majority of the time during the year. Treas. Reg. §1/121-1(b)(2).

4. During any five year period, a taxpayer can have more than one principal residence if each residence has been the taxpayer’s principal residence for two years. Treas. Reg. §1.121 -1(b)(4).

5. “Owned and used” can be satisfied by showing ownership and usage for twenty-four full months, or 730 days, either concurrently or for non-concurrent periods, if both usage and ownership exist for 730 days ending on the date of the “identifiable event.” Treas. Reg. §1.121–1(c)(2)(i). Seasonal absences when coupled with rental of the property are counted toward occupancy but each case depends on the facts and circumstances of that case. Id.

6.  Relevant factors, but not limited to the following factors, in determining a taxpayer’s principal residence, are: (1) taxpayer’s place of employment; (2) principal abode; (3) address used on tax return; (4) address on driver’s license, car registration, or voter registration; (5) location of church and recreational clubs or activities to which the taxpayer is affiliated. Treas. Reg. §1/121-1(b)(2).

7.  Property that may be used as a principal residence may include a detached family residence, a houseboat, house trailer, condominium, or cooperative. Treas. Reg. § 1.121-1(b)(1).

8.  In transfers of property between spouses in a divorce, the period the transferor spouse owned the property is included in the period that the transferee spouse owned the property.  However, the period that the transferor spouse used the property is not included in the period the transferee spouse used the property. Treas. Reg. § 1.121.-4(b)(2).

For any questions or concerns, please feel free to contact the law office of Arlington Heights attorney Robert S. Thomas.  To read Discharge of Debt part one, three or four click on each link.

Discharge (or Cancellation) of Debt (Part 1 of 4)

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Discharge (or Cancellation) of Debt (Part 1 of 4)

Arlington Heights bankruptcy attorney explains that when a borrower receives money in a loan transaction and the borrower does not pay the debt, the borrower’s wealth is deemed to have increased. 

This is known as “Discharge of Debt” or “Cancellation of Debt.” Because a “Discharge of Debt” increases the debtor’s wealth, the Internal Revenue Code (IRC) § 61 (a)(12) specifically includes this as gross income of the taxpayer.

However, IRC §108 provides five exceptions to § 61 (a)(12), under which a taxpayer may be excused from recognizing the discharge as gross income. We will only be addressing exception #1 in this newsletter; the remaining 4 will be addressed in the newsletter entitled, “Discharge of Debt, Part 4 of 4.

1.  Discharge of Qualified Principal Residence.  Under the Mortgage Debt Forgiveness Relief Act of 2007, a taxpayer may exclude from gross income and thus Federal income tax, the amount of mortgage debt that is reduced through short sales, mortgage modifications, and foreclosure.

            In order to qualify for the exclusion from Federal income taxes under the Mortgage Debt Forgiveness Relief Act of 2007, the following conditions must be met:

1. The debt (that is forgiven, discharged, or cancelled) must only be from commercial lenders loaned between January 1, 2007 and December 21, 2013 for qualified principal residences;

2. Up to $2 million of debt is eligible, or up to $1 million of debt if married and filing separately;

3. The debt forgiven only applies if derived from the short sale, mortgage modification, and/or foreclosure of a qualified principal residence;

4. The debt forgiven is for the first and/or second mortgage of a qualified principal residence;

5.  The taxpayer must file IRS Form 982 with the taxpayer’s tax returns, which states the amount of debt forgiven and it must be done in the tax year the debt is forgiven (VERY IMPORTANT!);

6.  The Act only applies to the “qualified principal residence.” This is a house that the taxpayer has owned and used as the taxpayer’s principal residence for a period of two or more years ending on the “identifiable event,” which means the event that determines when the debt was cancelled, reduced or forgiven, and the nature and timing of this event of each case.

For any questions or concerns, please feel free to contact the law office of Arlington Heights attorney Robert S. Thomas.  To read Discharge of Debt part two, three or four click on each link.