One topic affecting increasing numbers of people is: Cancellation of Debt income. The IRS has implemented a new information reporting form that is intended to inform IRS about transactions involving debt restructuring and / or cancellation.  Since the long standing rule is affecting so many, the rules are worth visiting, and a small sample of the kind of transactions are included in the following questions:

1)    I just received a 1099-C from our mortgage company and I realize it must be related to our house foreclosure.  Do we have to pay tax on the amount they included on the form—on top of losing our house?
Answer—It depends on whether you have refinanced or not. Purchase money mortgages, original mortgage loans in California, are non-recourse debt, and as such will not constitute taxable income.  But you will have to report the sale of your house, using the balance of the loan at the time of foreclosure as the selling price. The other rules pertaining to sale of residence gain exclusions will likely result in no tax from the foreclosure—small consolation, all things considered.

2)    We negotiated away part of our credit card debt last year. Now we get a 1099 in the mail reporting the reduction as income. If we do have to include that in our tax return, where does it go? Any difference if the cards were all related to our business?
Answer- yes you do get to include that as income, on line 21 of your 1040. You may also note that interest and fees charged to you will be included in the computation of what is reported as cancelled. And business use may make a difference—it could result in  the reported amount showing up on Schedule C as Other Income, which would make it subject to SE tax if the net business activity shows a profit!

The variety of circumstances resulting in reported debt cancellation are substantial, and there are several exclusions provided by Congress so not all 1099-C’s will result in taxable income.  Very likely returns will have to include a Form 982 claiming which of the six (6) exclusions apply. And it is possible the reported amount is incorrect, so retaining records even in a repossession situation may be important to be confident yours has not been over reported!