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Debt Income Cancellation on a Personal Home

Wed, Jul 10, 2019  Tax Forms

Debt Income Cancellation

 The Mortgage Debt Relief Act of 2007 allows taxpayers to exclude income from the discharge of debt on their principal residence. The provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for the exclusion ($1 million, if married filing separately.)

Cancellation of debt income is reported on Form 1099-C. Only the amount of the loan outstanding that exceeds the fair market value of the home when foreclosed is considered cancellation of debt income. If part of the loan canceled is not qualified principal residence indebtedness, that portion may still be taxable. For more information, see IRS Pub. 4681.

Example Form:

 

 

 

 

 NOTE:  Do not enter anything on Form 1099-C, as the Form 1099-C is only used if carrying a taxable amount of cancellation of debt income. When using Form 982 to exclude the cancellation of debt income, there is no taxable amount. 

The following steps provide how to exclude Cancellation of Debt Income:

  1. Click Add Form on the tax return toolbar.
  2. Enter Schedule/Form Number box, enter 982 & hit Enter on the keyboard. 
    1. In Line 1, select the Discharge of qualified principal residence indebtedness check box.
    2. In Line 2, type the amount of cancelled debt from Form 1099-C Box 2.
    3. If the taxpayer still owns the home, in Line 10b, enter the amount of cancelled debt included on Line 2 or the basis (generally cost plus improvements) of the principal residence, whichever is the lesser amount.
  3. If there is an amount in Form 1099-C Box 7, fair market value of the property, then the Home Sale Worksheet should also be completed to calculate any gain on disposition of the primary home.

 

 
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