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Irs Amendment

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Irs Amendment

Irs amendment Publication 721 - Additional Material Prev  Up  Next   Home   More Online Publications
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The Irs Amendment

Irs amendment 2. Irs amendment   Foreclosures and Repossessions Table of Contents Amount realized and ordinary income on a recourse debt. Irs amendment Amount realized on a nonrecourse debt. Irs amendment If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. Irs amendment The foreclosure or repossession is treated as a sale from which you may realize gain or loss. Irs amendment This is true even if you voluntarily return the property to the lender. Irs amendment If the outstanding loan balance was more than the FMV of the property and the lender cancels all or part of the remaining loan balance, you also may realize ordinary income from the cancellation of debt. Irs amendment You must report this income on your return unless certain exceptions or exclusions apply. Irs amendment See chapter 1 for more details. Irs amendment Borrower's gain or loss. Irs amendment    You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale. Irs amendment The gain is the difference between the amount realized and your adjusted basis in the transferred property (amount realized minus adjusted basis). Irs amendment The loss is the difference between your adjusted basis in the transferred property and the amount realized (adjusted basis minus amount realized). Irs amendment For more information on figuring gain or loss from the sale of property, see Gain or Loss From Sales and Exchanges in Publication 544. Irs amendment You can use Table 1-1 to figure your ordinary income from the cancellation of debt and your gain or loss from a foreclosure or repossession. Irs amendment Amount realized and ordinary income on a recourse debt. Irs amendment    If you are personally liable for the debt, the amount realized on the foreclosure or repossession includes the smaller of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The FMV of the transferred property. Irs amendment The amount realized also includes any proceeds you received from the foreclosure sale. Irs amendment If the FMV of the transferred property is less than the total outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, the difference is ordinary income from the cancellation of debt. Irs amendment You must report this income on your return unless certain exceptions or exclusions apply. Irs amendment See chapter 1 for more details. Irs amendment       Example 1. Irs amendment Tara bought a new car for $15,000. Irs amendment She made a $2,000 downpayment and borrowed the remaining $13,000 from the dealer's credit company. Irs amendment Tara is personally liable for the loan (recourse debt) and the car is pledged as security for the loan. Irs amendment On August 1, 2013, the credit company repossessed the car because Tara had stopped making loan payments. Irs amendment The balance due after taking into account the payments Tara made was $10,000. Irs amendment The FMV of the car when it was repossessed was $9,000. Irs amendment On November 15, 2013, the credit company forgave the remaining $1,000 balance on the loan due to insufficient assets. Irs amendment In this case, the amount Tara realizes is $9,000. Irs amendment This is the smaller of: The $10,000 outstanding debt immediately before the repossession reduced by the $1,000 for which she remains personally liable immediately after the repossession ($10,000 − $1,000 = $9,000), or The $9,000 FMV of the car. Irs amendment Tara figures her gain or loss on the repossession by comparing the $9,000 amount realized with her $15,000 adjusted basis. Irs amendment She has a $6,000 nondeductible loss. Irs amendment After the cancellation of the remaining balance on the loan in November, Tara also has ordinary income from cancellation of debt in the amount of $1,000 (the remaining balance on the $10,000 loan after the $9,000 amount satisfied by the FMV of the repossessed car). Irs amendment Tara must report this $1,000 on her return unless one of the exceptions or exclusions described in chapter 1 applies. Irs amendment Example 2. Irs amendment Lili paid $200,000 for her home. Irs amendment She made a $15,000 downpayment and borrowed the remaining $185,000 from a bank. Irs amendment Lili is personally liable for the mortgage loan and the house secures the loan. Irs amendment In 2013, the bank foreclosed on the mortgage because Lili stopped making payments. Irs amendment When the bank foreclosed the mortgage, the balance due was $180,000, the FMV of the house was $170,000, and Lili's adjusted basis was $175,000 due to a casualty loss she had deducted. Irs amendment At the time of the foreclosure, the bank forgave $2,000 of the $10,000 debt in excess of the FMV ($180,000 minus $170,000). Irs amendment She remained personally liable for the $8,000 balance. Irs amendment In this case, Lili has ordinary income from the cancellation of debt in the amount of $2,000. Irs amendment The $2,000 income from the cancellation of debt is figured by subtracting the $170,000 FMV of the house from the $172,000 difference between her total outstanding debt immediately before the transfer of property and the amount for which she remains personally liable immediately after the transfer ($180,000 minus $8,000). Irs amendment She is able to exclude the $2,000 of canceled debt from her income under the qualified principal residence indebtedness rules discussed earlier. Irs amendment Lili must also determine her gain or loss from the foreclosure. Irs amendment In this case, the amount that she realizes is $170,000. Irs amendment This is the smaller of: (a) the $180,000 outstanding debt immediately before the transfer reduced by the $8,000 for which she remains personally liable immediately after the transfer ($180,000 − $8,000 = $172,000) or (b) the $170,000 FMV of the house. Irs amendment Lili figures her gain or loss on the foreclosure by comparing the $170,000 amount realized with her $175,000 adjusted basis. Irs amendment She has a $5,000 nondeductible loss. Irs amendment Table 1-1. Irs amendment Worksheet for Foreclosures and Repossessions Part 1. Irs amendment Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Irs amendment Otherwise, go to Part 2. Irs amendment 1. Irs amendment Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property   2. Irs amendment Enter the fair market value of the transferred property   3. Irs amendment Ordinary income from the cancellation of debt upon foreclosure or repossession. Irs amendment * Subtract line 2 from line 1. Irs amendment If less than zero, enter zero. Irs amendment Next, go to Part 2   Part 2. Irs amendment Gain or loss from foreclosure or repossession. Irs amendment   4. Irs amendment Enter the smaller of line 1 or line 2. Irs amendment If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property   5. Irs amendment Enter any proceeds you received from the foreclosure sale   6. Irs amendment Add line 4 and line 5   7. Irs amendment Enter the adjusted basis of the transferred property   8. Irs amendment Gain or loss from foreclosure or repossession. Irs amendment Subtract line 7 from line 6   * The income may not be taxable. Irs amendment See chapter 1 for more details. Irs amendment Amount realized on a nonrecourse debt. Irs amendment    If you are not personally liable for repaying the debt secured by the transferred property, the amount you realize includes the full amount of the outstanding debt immediately before the transfer. Irs amendment This is true even if the FMV of the property is less than the outstanding debt immediately before the transfer. Irs amendment Example 1. Irs amendment Tara bought a new car for $15,000. Irs amendment She made a $2,000 downpayment and borrowed the remaining $13,000 from the dealer's credit company. Irs amendment Tara is not personally liable for the loan (nonrecourse), but pledged the new car as security for the loan. Irs amendment On August 1, 2013, the credit company repossessed the car because Tara had stopped making loan payments. Irs amendment The balance due after taking into account the payments Tara made was $10,000. Irs amendment The FMV of the car when it was repossessed was $9,000. Irs amendment The amount Tara realized on the repossession is $10,000. Irs amendment That is the outstanding amount of debt immediately before the repossession, even though the FMV of the car is less than $10,000. Irs amendment Tara figures her gain or loss on the repossession by comparing the $10,000 amount realized with her $15,000 adjusted basis. Irs amendment Tara has a $5,000 nondeductible loss. Irs amendment Example 2. Irs amendment Lili paid $200,000 for her home. Irs amendment She made a $15,000 downpayment and borrowed the remaining $185,000 from a bank. Irs amendment She is not personally liable for the loan, but grants the bank a mortgage. Irs amendment The bank foreclosed on the mortgage because Lili stopped making payments. Irs amendment When the bank foreclosed on the mortgage, the balance due was $180,000, the FMV of the house was $170,000, and Lili's adjusted basis was $175,000 due to a casualty loss she had deducted. Irs amendment The amount Lili realized on the foreclosure is $180,000, the outstanding debt immediately before the foreclosure. Irs amendment She figures her gain or loss by comparing the $180,000 amount realized with her $175,000 adjusted basis. Irs amendment Lili has a $5,000 realized gain. Irs amendment See Publication 523 to figure and report any taxable amount. Irs amendment Forms 1099-A and 1099-C. Irs amendment    A lender who acquires an interest in your property in a foreclosure or repossession should send you Form 1099-A, Acquisition or Abandonment of Secured Property, showing information you need to figure your gain or loss. Irs amendment However, if the lender also cancels part of your debt and must file Form 1099-C, the lender can include the information about the foreclosure or repossession on that form instead of on Form 1099-A. Irs amendment The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Irs amendment For foreclosures or repossessions occurring in 2013, these forms should be sent to you by January 31, 2014. Irs amendment Prev  Up  Next   Home   More Online Publications