Forgiveness of Indebtedness Income: 1099-C
In accordance with the Internal Revenue Code (I.R.C.) 26 U.S.C. Section
6050P, when a debt in an amount of $600 or greater is discharged, it is
a taxable gain to the debtor and imposes an obligation of the creditor
to file Form 1099-C with the IRS. In other words, historically, if a debt
was forgiven against a debtor, you would be taxed on the amount of debt
forgiven. So, for example, if your effective income tax rate was 25% and
10,000.00 of indebtedness was forgiven against you, you would be treated
as receiving $10,000.00 income, thereby owing the IRS $2,500.00!
One of eight triggering events must occur before an organization is required
to file Form 1099–C.
These events are:
- Discharge of a business or investment debt in bankruptcy.
- Settlement of a debt.
- Cessation of collection activity.
- Statute of limitations raised as an affirmative defense.
- Expiration of the non–payment testing period.
- Probate proceeding.
- Debt unenforceable in receivership or foreclosure proceeding.
Prior to Jan. 31 of the year following the occurrence of the triggering
event, the creditor must
provide a statement to the debtor.
Mortgage Forgiveness Debt Relief Act of 2007
President Bush signed the Mortgage Forgiveness Debt Relief Act Dec. 20,
2007. Here's a summary of the bill's main provisions.
Income from Discharge of Indebtedness on Principal Residence
This provision is effective Jan. 1, 2007, through Dec. 31, 2009. Under
this provision, which adds new IRC section 108(a)(1)(E), the discharge
of qualified principal residence indebtedness is excluded from gross income.
For purposes of the exclusion, qualified principal residence indebtedness
is acquisition indebtedness (to buy, build or improve the residence) up
to $2 million ($1 million for Married Filing Separately). The home must
be owned and used as a principal residence (within the meaning of section
121). The basis of the home must be reduced (but not below zero) by any
debt forgiveness excluded under this provision.
If only a portion of the loan discharged is qualified indebtedness, the
exclusion applies only to the amount of debt discharged that exceeds the
amount of the loan that exceeds the nonqualified indebtedness.
For example, assume that a taxpayer has a $500,000 loan outstanding on
his principal residence, of which $80,000 is equity debt. If $100,000
of the loan amount is discharged, only $20,000 ($100,000 discharged debt
— $80,000 equity debt) of the debt discharge qualifies for the exclusion
under the new provision.
This provision does not apply to discharge of indebtedness on account of
services performed for the lender. Also, an insolvent taxpayer must use
the principal residence exclusion instead of the insolvency exception,
unless the taxpayer makes an election to apply the insolvency exception
instead of the exclusion provision.
Exclusion of Sale of Residence Gain for Surviving Spouses
This provision is effective for sales and exchanges after Dec. 31, 2007.
For sales within 2 years of a spouse's death, the capital gain exclusion
is increased to $500,000 if the surviving spouse hasn't remarried
and the ownership and use tests were met by both taxpayers immediately
before the date of death. This provision adds new section 121(b)(4).