Financial hardships can lead to abandoned or foreclosed properties, bankruptcy filings and debt restructuring. Tax preparers are seeing more Forms 1099-A, Acquisition or Abandonment of Secured Property, and 1099-C, Cancellation of Debt, included in their clients’ year-end information.
In our on-demand webinar, Reporting Repossessions and Cancellation of Debt Income, instructor Lawrence Zimbler, MST, EA, discusses why it’s the tax professional’s job to determine whether the client has taxable income as a result and how to report it. Additionally, he’ll cover when to use Form 982.
Below, you’ll find a few of the top questions webinar attendees had, along with the accompanying answers.
Q: If Form 1099-A is received in Year 1 and Form 1099-C is received in Year 2, do we have to file both forms as separate events even though they’re for the same property? A: Yes. Each form and related event is filed in the year the taxpayer receives the specific form. In your case, the sale of the property using Form 1099-A is reported in Year 1 and the cancellation of debt income from Form 1099-C is reported in Year 2.
Q: What is Form 982?
A: Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), is used to determine, under certain circumstances described in §108, the amount of discharged indebtedness that can be excluded from gross income.
Q: Could you please provide an example of basis reduction?
A: One example would be reducing the basis of a taxpayer’s home by the amount of the debt canceled.
Q: If the taxpayer returns the property to the lender and still receives Form 1099-C from the bank, is that considered income?
A: It may be considered income if the taxpayer is solvent. However, to the extent the taxpayer is insolvent or in bankruptcy, or the home is a principal residence, the taxpayer may be able to exclude the debt from income.
To learn more about reporting repossessions and cancellation of debt income, you can watch our on-demand webinar. You’ll have access to the full recording, earn up to 2 CPE for AFSP, EA, CPA, CRTP, and be able to view the entire list of Q&As. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more about membership, join our completely free 30-day trial, visit natptax.com/explore.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.