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Www ir gov 1. Www ir gov   Canceled Debts Table of Contents General RulesForm 1099-C Discounts and loan modifications Sales or other dispositions (such as foreclosures and repossessions) Abandonments Stockholder debt This chapter discusses the tax treatment of canceled debts. Www ir gov General Rules Generally, if a debt for which you are personally liable is forgiven or discharged for less than the full amount owed, the debt is considered canceled in whatever amount it remained unpaid. Www ir gov There are exceptions to this rule, discussed under Exceptions , later. Www ir gov Generally, you must include the canceled debt in your income. Www ir gov However, you may be able to exclude the canceled debt. Www ir gov See Exclusions , later. Www ir gov Example. Www ir gov John owed $1,000 to Mary. Www ir gov Mary agreed to accept and John paid $400 in satisfaction of the entire debt. Www ir gov John has canceled debt of $600. Www ir gov Example. Www ir gov Margaret owed $1,000 to Henry. Www ir gov Henry and Margaret agreed that Margaret would provide Henry with services (instead of money) in full satisfaction of the debt. Www ir gov Margaret does not have canceled debt. Www ir gov Instead, she has income from services. Www ir gov A debt includes any indebtedness: For which you are liable, or Subject to which you hold property. Www ir gov Debt for which you are personally liable is recourse debt. Www ir gov All other debt is nonrecourse debt. Www ir gov If you are not personally liable for the debt, you do not have ordinary income from the cancellation of debt unless you retain the collateral and either: The lender offers a discount for the early payment of the debt, or The lender agrees to a loan modification that results in the reduction of the principal balance of the debt. Www ir gov See Discounts and loan modifications , later. Www ir gov However, upon the disposition of the property securing a nonrecourse debt, the amount realized includes the entire unpaid amount of the debt, not just the FMV of the property. Www ir gov As a result, you may realize a gain or loss if the outstanding debt immediately before the disposition is more or less than your adjusted basis in the property. Www ir gov For more details on figuring your gain or loss, see chapter 2 of this publication or see Publication 544. Www ir gov There are several exceptions and exclusions that may result in part or all of a canceled debt being nontaxable. Www ir gov See Exceptions and Exclusions, later. Www ir gov You must report any taxable canceled debt as ordinary income on: Form 1040 or Form 1040NR, line 21, if the debt is a nonbusiness debt; Schedule C (Form 1040), line 6 (or Schedule C-EZ (Form 1040), line 1), if the debt is related to a nonfarm sole proprietorship; Schedule E (Form 1040), line 3, if the debt is related to nonfarm rental of real property; Form 4835, line 6, if the debt is related to a farm rental activity for which you use Form 4835 to report farm rental income based on crops or livestock produced by a tenant; or Schedule F (Form 1040), line 8, if the debt is farm debt and you are a farmer. Www ir gov Form 1099-C If you receive a Form 1099-C, that means an applicable entity has reported an identifiable event to the IRS regarding a debt you owe. Www ir gov The identifiable event may be an actual cancellation of the debt or it may be an event the applicable entity is required, solely for purposes of reporting to the IRS, to treat as a cancellation of debt. Www ir gov For information on the reasons an applicable entity files Form 1099-C, see Identifiable event codes, later. Www ir gov Unless you meet one of the exceptions or exclusions discussed later, this canceled debt is ordinary income and must be reported on the appropriate form discussed above. Www ir gov An applicable entity includes: A federal government agency, A financial institution, A credit union, and Any organization a significant trade or business of which is lending money. Www ir gov Identifiable event codes. Www ir gov    Box 6 of Form 1099-C should indicate the reason the creditor filed this form. Www ir gov The codes shown in box 6 are explained below. Www ir gov Also see the chart after the explanation for a quick reference guide for the codes used in Box 6. Www ir gov Note. Www ir gov Codes A through G and I identify specific occurrences resulting from an actual discharge of indebtedness. Www ir gov However, Code H, Expiration of nonpayment testing period, does not necessarily identify an actual discharge of indebtedness. Www ir gov Code A — Bankruptcy. Www ir gov Code A is used to identify cancellation of debt as a result of a title 11 bankruptcy case. Www ir gov See Bankruptcy , later. Www ir gov Code B — Other judicial debt relief. Www ir gov Code B is used to identify cancellation of debt as a result of a receivership, foreclosure, or similar federal or state court proceeding other than bankruptcy. Www ir gov Code C — Statute of limitations or expiration of deficiency period. Www ir gov Code C is used to identify cancellation of debt either when the statute of limitations for collecting the debt expires or when the statutory period for filing a claim or beginning a deficiency judgment proceeding expires. Www ir gov In the case of the expiration of a statute of limitations, an identifiable event occurs only if and when your affirmative defense of the statute of limitations is upheld in a final judgment or decision in a judicial proceeding, and the period for appealing the judgment or decision has expired. Www ir gov Code D — Foreclosure election. Www ir gov Code D is used to identify cancellation of debt when the creditor elects foreclosure remedies that statutorily end or bar the creditor's right to pursue collection of the debt. Www ir gov This event applies to a mortgage lender or holder who is barred from pursuing debt collection after a power of sale in the mortgage or deed of trust is exercised. Www ir gov Code E — Debt relief from probate or similar proceeding. Www ir gov Code E is used to identify cancellation of debt as a result of a probate court or similar legal proceeding. Www ir gov Code F — By agreement. Www ir gov Code F is used to identify cancellation of debt as a result of an agreement between the creditor and the debtor to cancel the debt at less than full consideration. Www ir gov Code G — Decision or policy to discontinue collection. Www ir gov Code G is used to identify cancellation of debt as a result of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. Www ir gov For purposes of this identifiable event, a defined policy includes both a written policy and the creditor's established business practice. Www ir gov Code H — Expiration of nonpayment testing period. Www ir gov Code H is used to indicate that the creditor has not received a payment on the debt during a testing period ending on December 31, 2013. Www ir gov The testing period is a 36-month period increased by the number of months the creditor was prevented from engaging in collection activity by a stay in bankruptcy or similar bar under state or local law. Www ir gov This identifiable event applies only for a creditor that is a financial institution or credit union (and certain of their subsidiaries), the Federal Deposit Insurance Corporation (FDIC), Resolution Trust Corporation (RTC), National Credit Union Administration (NCUA), and other Federal executive agencies. Www ir gov Expiration of the nonpayment testing period does not necessarily result from an actual discharge of indebtedness. Www ir gov Code I — Other actual discharge before identifiable event. Www ir gov Code I is used to identify an actual cancellation of debt that occurs before any of the identifiable events described in codes A through H. Www ir gov Form 1099-C Reference Guide for Box 6 Identifiable Event Codes A Bankruptcy B Other judicial debt relief C Statute of limitations or expiration of deficiency period D Foreclosure election E Debt relief from probate or similar proceeding F By agreement G Decision or policy to discontinue collection H Expiration of nonpayment testing period I Other actual discharge before identifiable event Even if you did not receive a Form 1099-C, you must report canceled debt as gross income on your tax return unless one of the exceptions or exclusions described later applies. Www ir gov Amount of canceled debt. Www ir gov    The amount in box 2 of Form 1099-C may represent some or all of the debt that has been canceled or treated as canceled. Www ir gov The amount in box 2 will include principal and may include interest and other nonprincipal amounts (such as fees or penalties). Www ir gov Unless you meet one of the exceptions or exclusions discussed later, the amount of the debt that has been canceled is ordinary income and must be reported on the appropriate form as discussed earlier. Www ir gov Interest included in canceled debt. Www ir gov    If any interest is included in the amount of canceled debt in box 2, it will be shown in box 3. Www ir gov Whether the interest portion of the canceled debt must be included in your income depends on whether the interest would be deductible if you paid it. Www ir gov See Deductible Debt under Exceptions, later. Www ir gov Persons who each receive a Form 1099-C showing the full amount of debt. Www ir gov    If you and another person were jointly and severally liable for a canceled debt, each of you may get a Form 1099-C showing the entire amount of the canceled debt. Www ir gov However, you may not have to report that entire amount as income. Www ir gov The amount, if any, you must report depends on all the facts and circumstances, including: State law, The amount of debt proceeds each person received, How much of any interest deduction from the debt was claimed by each person, How much of the basis of any co-owned property bought with the debt proceeds was allocated to each co-owner, and Whether the canceled debt qualifies for any of the exceptions or exclusions described in this publication. Www ir gov See Example 3 under Insolvency, later. Www ir gov Discounts and loan modifications If a lender discounts (reduces) the principal balance of a loan because you pay it off early, or agrees to a loan modification (a “workout”) that includes a reduction in the principal balance of a loan, the amount of the discount or the amount of principal reduction is canceled debt. Www ir gov However, if the debt is nonrecourse and you did not retain the collateral, you do not have cancellation of the debt income. Www ir gov The amount of the canceled debt must be included in income unless one of the exceptions or exclusions described later applies. Www ir gov For more details, see Exceptions and Exclusions, later. Www ir gov Sales or other dispositions (such as foreclosures and repossessions) Recourse debt. Www ir gov   If you owned property that was subject to a recourse debt in excess of the FMV of the property, the lender's foreclosure or repossession of the property is treated as a sale or disposition of the property by you and may result in your realization of gain or loss. Www ir gov The gain or loss on the disposition of the property is measured by the difference between the FMV of the property at the time of the disposition and your adjusted basis (usually your cost) in the property. Www ir gov The character of the gain or loss (such as ordinary or capital) is determined by the character of the property. Www ir gov If the lender forgives all or part of the amount of the debt in excess of the FMV of the property, the cancellation of the excess debt may result in ordinary income. Www ir gov The ordinary income from the cancellation of debt (the excess of the canceled debt over the FMV of the property) must be included in your gross income reported on your tax return unless one of the exceptions or exclusions described later applies. Www ir gov For more details, see Exceptions and Exclusions, later. Www ir gov Nonrecourse debt. Www ir gov   If you owned property that was subject to a nonrecourse debt in excess of the FMV of the property, the lender's foreclosure on the property does not result in ordinary income from the cancellation of debt. Www ir gov The entire amount of the nonrecourse debt is treated as an amount realized on the disposition of the property. Www ir gov The gain or loss on the disposition of the property is measured by the difference between the total amount realized (the entire amount of the nonrecourse debt plus the amount of cash and the FMV of any property received) and your adjusted basis in the property. Www ir gov The character of the gain or loss is determined by the character of the property. Www ir gov More information. Www ir gov    See Publications 523, 544, and 551, and chapter 2 of this publication for more details. Www ir gov Abandonments Recourse debt. Www ir gov   If you abandon property that secures a debt for which you are personally liable (recourse debt) and the debt is canceled, you will realize ordinary income equal to the canceled debt. Www ir gov You must report this income on your tax return unless one of the exceptions or exclusions described later applies. Www ir gov For more details, see Exceptions and Exclusions, later. Www ir gov This income is separate from any amount realized from the abandonment of the property. Www ir gov For more details, see chapter 3. Www ir gov Nonrecourse debt. Www ir gov   If you abandon property that secures a debt for which you are not personally liable (nonrecourse debt), you may realize gain or loss but will not have cancellation of indebtedness income. Www ir gov Stockholder debt If you are a stockholder in a corporation and the corporation cancels or forgives your debt to it, the canceled debt is a constructive distribution. Www ir gov For more information, see Publication 542, Corporations. Www ir gov Prev  Up  Next   Home   More Online Publications
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Www ir gov Publication 4492-A - Introductory Material Table of Contents Introduction Useful Items - You may want to see: Introduction This publication explains the temporary tax relief provided by the Food, Conservation, and Energy Act of 2008 for taxpayers in Kiowa County, Kansas, and surrounding areas, who were affected by the storms and tornadoes that began on May 4, 2007. Www ir gov Useful Items - You may want to see: Publication 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 547 Casualties, Disasters, and Thefts 590 Individual Retirement Arrangements (IRAs) 946 How To Depreciate Property Form (and Instructions) 4506Request for Copy of Tax Return 4506-TRequest for Transcript of Tax Return 4684Casualties and Thefts 5884-ACredits for Employers Affected by Hurricane Katrina, Rita, or Wilma 8606Nondeductible IRAs 8915Qualified Hurricane Retirement Plan Distributions and Repayments See How To Get Tax Help on page 14 for information about getting publications and forms. Www ir gov Prev  Up  Next   Home   More Online Publications