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1040ez file on line 1. 1040ez file on line   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. 1040ez file on line 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. 1040ez file on line There are exceptions to this rule, discussed under Exceptions , later. 1040ez file on line Generally, you must include the canceled debt in your income. 1040ez file on line However, you may be able to exclude the canceled debt. 1040ez file on line See Exclusions , later. 1040ez file on line Example. 1040ez file on line John owed $1,000 to Mary. 1040ez file on line Mary agreed to accept and John paid $400 in satisfaction of the entire debt. 1040ez file on line John has canceled debt of $600. 1040ez file on line Example. 1040ez file on line Margaret owed $1,000 to Henry. 1040ez file on line Henry and Margaret agreed that Margaret would provide Henry with services (instead of money) in full satisfaction of the debt. 1040ez file on line Margaret does not have canceled debt. 1040ez file on line Instead, she has income from services. 1040ez file on line A debt includes any indebtedness: For which you are liable, or Subject to which you hold property. 1040ez file on line Debt for which you are personally liable is recourse debt. 1040ez file on line All other debt is nonrecourse debt. 1040ez file on line 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. 1040ez file on line See Discounts and loan modifications , later. 1040ez file on line 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. 1040ez file on line 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. 1040ez file on line For more details on figuring your gain or loss, see chapter 2 of this publication or see Publication 544. 1040ez file on line There are several exceptions and exclusions that may result in part or all of a canceled debt being nontaxable. 1040ez file on line See Exceptions and Exclusions, later. 1040ez file on line 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. 1040ez file on line 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. 1040ez file on line 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. 1040ez file on line For information on the reasons an applicable entity files Form 1099-C, see Identifiable event codes, later. 1040ez file on line 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. 1040ez file on line 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. 1040ez file on line Identifiable event codes. 1040ez file on line    Box 6 of Form 1099-C should indicate the reason the creditor filed this form. 1040ez file on line The codes shown in box 6 are explained below. 1040ez file on line Also see the chart after the explanation for a quick reference guide for the codes used in Box 6. 1040ez file on line Note. 1040ez file on line Codes A through G and I identify specific occurrences resulting from an actual discharge of indebtedness. 1040ez file on line However, Code H, Expiration of nonpayment testing period, does not necessarily identify an actual discharge of indebtedness. 1040ez file on line Code A — Bankruptcy. 1040ez file on line Code A is used to identify cancellation of debt as a result of a title 11 bankruptcy case. 1040ez file on line See Bankruptcy , later. 1040ez file on line Code B — Other judicial debt relief. 1040ez file on line 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. 1040ez file on line Code C — Statute of limitations or expiration of deficiency period. 1040ez file on line 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. 1040ez file on line 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. 1040ez file on line Code D — Foreclosure election. 1040ez file on line 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. 1040ez file on line 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. 1040ez file on line Code E — Debt relief from probate or similar proceeding. 1040ez file on line Code E is used to identify cancellation of debt as a result of a probate court or similar legal proceeding. 1040ez file on line Code F — By agreement. 1040ez file on line 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. 1040ez file on line Code G — Decision or policy to discontinue collection. 1040ez file on line 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. 1040ez file on line For purposes of this identifiable event, a defined policy includes both a written policy and the creditor's established business practice. 1040ez file on line Code H — Expiration of nonpayment testing period. 1040ez file on line 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. 1040ez file on line 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. 1040ez file on line 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. 1040ez file on line Expiration of the nonpayment testing period does not necessarily result from an actual discharge of indebtedness. 1040ez file on line Code I — Other actual discharge before identifiable event. 1040ez file on line 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. 1040ez file on line 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. 1040ez file on line Amount of canceled debt. 1040ez file on line    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. 1040ez file on line The amount in box 2 will include principal and may include interest and other nonprincipal amounts (such as fees or penalties). 1040ez file on line 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. 1040ez file on line Interest included in canceled debt. 1040ez file on line    If any interest is included in the amount of canceled debt in box 2, it will be shown in box 3. 1040ez file on line 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. 1040ez file on line See Deductible Debt under Exceptions, later. 1040ez file on line Persons who each receive a Form 1099-C showing the full amount of debt. 1040ez file on line    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. 1040ez file on line However, you may not have to report that entire amount as income. 1040ez file on line 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. 1040ez file on line See Example 3 under Insolvency, later. 1040ez file on line 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. 1040ez file on line However, if the debt is nonrecourse and you did not retain the collateral, you do not have cancellation of the debt income. 1040ez file on line The amount of the canceled debt must be included in income unless one of the exceptions or exclusions described later applies. 1040ez file on line For more details, see Exceptions and Exclusions, later. 1040ez file on line Sales or other dispositions (such as foreclosures and repossessions) Recourse debt. 1040ez file on line   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. 1040ez file on line 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. 1040ez file on line The character of the gain or loss (such as ordinary or capital) is determined by the character of the property. 1040ez file on line 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. 1040ez file on line 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. 1040ez file on line For more details, see Exceptions and Exclusions, later. 1040ez file on line Nonrecourse debt. 1040ez file on line   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. 1040ez file on line The entire amount of the nonrecourse debt is treated as an amount realized on the disposition of the property. 1040ez file on line 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. 1040ez file on line The character of the gain or loss is determined by the character of the property. 1040ez file on line More information. 1040ez file on line    See Publications 523, 544, and 551, and chapter 2 of this publication for more details. 1040ez file on line Abandonments Recourse debt. 1040ez file on line   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. 1040ez file on line You must report this income on your tax return unless one of the exceptions or exclusions described later applies. 1040ez file on line For more details, see Exceptions and Exclusions, later. 1040ez file on line This income is separate from any amount realized from the abandonment of the property. 1040ez file on line For more details, see chapter 3. 1040ez file on line Nonrecourse debt. 1040ez file on line   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. 1040ez file on line 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. 1040ez file on line For more information, see Publication 542, Corporations. 1040ez file on line Prev  Up  Next   Home   More Online 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