Filing Your Taxes Online is Fast, Easy and Secure.
Start now and receive your tax refund in as little as 7 days.

1. Get Answers

Your online questions are customized to your unique tax situation.

2. Maximize your Refund

Find tax credits for everything from school tuition to buying a hybri

3. E-File for FREE

E-file free with direct deposit to get your refund in as few as 7 days.

Filing your taxes with paper mail can be difficult and it could take weeks for your refund to arrive. IRS e-file is easy, fast and secure. There is no paperwork going to the IRS so tax refunds can be processed in as little as 7 days with direct deposit. As you prepare your taxes online, you can see your tax refund in real time.

FREE audit support and representation from an enrolled agent – NEW and only from H&R Block

File Taxes 2012

File An Amended Tax ReturnHow To Amend Federal Income Tax ReturnIrs Form 1040ez 2013Irs 1040ezHow To File A 1040 EzStudents Filing Taxes 2013Tax Forms For 20102009 Tax FormsAmending My 2010 Tax ReturnHow Do I File An Amended Tax ReturnAmending Tax Return OnlineFree 1040Didnt File 2012 Taxes2010 Tax FormFree Tax File 2010Irs Amendment FormH And R Block Free FederalHow Can I Do My 2012 Federal Tax Return With H&r Block2010 Tax Form 1040x2012 Amended Tax Return FormStudent Tax Return 2011Free Turbo Tax Filing 2012Amendment Tax ReturnEasy Tax FormsTaxact 2011 Free Federal Edition DownloadFiling State Return1040 Ez Forms For 20122013 1040ezIrs 2012 Tax Forms 1040ezE File 2010 Taxes For FreeHave Not Filed 2011 Taxes2010 Form 1040xBack TaxesFiling Taxes LateWww Mypay GovHr Block ComFree Tax Usa 2011H&rblock ComForm 1040x Turbotax1040ez State Tax Form

File Taxes 2012

File taxes 2012 1. File taxes 2012   Rental Income and Expenses (If No Personal Use of Dwelling) Table of Contents Rental IncomeWhen To Report Types of Income Rental ExpensesWhen To Deduct Types of Expenses This chapter discusses the various types of rental income and expenses for a residential rental activity with no personal use of the dwelling. File taxes 2012 Generally, each year you will report all income and deduct all out-of-pocket expenses in full. File taxes 2012 The deduction to recover the cost of your rental property—depreciation—is taken over a prescribed number of years, and is discussed in chapter 2, Depreciation of Rental Property. File taxes 2012 If your rental income is from property you also use personally or rent to someone at less than a fair rental price, first read the information in chapter 5 , Personal Use of Dwelling Unit (Including Vacation Home). File taxes 2012 Rental Income In most cases, you must include in your gross income all amounts you receive as rent. File taxes 2012 Rental income is any payment you receive for the use or occupation of property. File taxes 2012 In addition to amounts you receive as normal rental payments, there are other amounts that may be rental income. File taxes 2012 When To Report When you report rental income on your tax return generally depends on whether you are a cash basis taxpayer or use an accrual method. File taxes 2012 Most individual taxpayers use the cash method. File taxes 2012 Cash method. File taxes 2012   You are a cash basis taxpayer if you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. File taxes 2012 You constructively receive income when it is made available to you, for example, by being credited to your bank account. File taxes 2012 Accrual method. File taxes 2012    If you are an accrual basis taxpayer, you generally report income when you earn it, rather than when you receive it. File taxes 2012 You generally deduct your expenses when you incur them, rather than when you pay them. File taxes 2012 More information. File taxes 2012   See Publication 538, Accounting Periods and Methods, for more information about when you constructively receive income and accrual methods of accounting. File taxes 2012 Types of Income The following are common types of rental income. File taxes 2012 Advance rent. File taxes 2012   Advance rent is any amount you receive before the period that it covers. File taxes 2012 Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. File taxes 2012 Example. File taxes 2012 On March 18, 2013, you signed a 10-year lease to rent your property. File taxes 2012 During 2013, you received $9,600 for the first year's rent and $9,600 as rent for the last year of the lease. File taxes 2012 You must include $19,200 in your rental income in the first year. File taxes 2012 Canceling a lease. File taxes 2012   If your tenant pays you to cancel a lease, the amount you receive is rent. File taxes 2012 Include the payment in your income in the year you receive it regardless of your method of accounting. File taxes 2012 Expenses paid by tenant. File taxes 2012   If your tenant pays any of your expenses, those payments are rental income. File taxes 2012 Because you must include this amount in income, you can also deduct the expenses if they are deductible rental expenses. File taxes 2012 For more information, see Rental Expenses , later. File taxes 2012 Example 1. File taxes 2012 Your tenant pays the water and sewage bill for your rental property and deducts the amount from the normal rent payment. File taxes 2012 Under the terms of the lease, your tenant does not have to pay this bill. File taxes 2012 Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. File taxes 2012 You can deduct the utility payment made by your tenant as a rental expense. File taxes 2012 Example 2. File taxes 2012 While you are out of town, the furnace in your rental property stops working. File taxes 2012 Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. File taxes 2012 Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. File taxes 2012 You can deduct the repair payment made by your tenant as a rental expense. File taxes 2012 Property or services. File taxes 2012   If you receive property or services as rent, instead of money, include the fair market value of the property or services in your rental income. File taxes 2012   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. File taxes 2012 Example. File taxes 2012 Your tenant is a house painter. File taxes 2012 He offers to paint your rental property instead of paying 2 months rent. File taxes 2012 You accept his offer. File taxes 2012 Include in your rental income the amount the tenant would have paid for 2 months rent. File taxes 2012 You can deduct that same amount as a rental expense for painting your property. File taxes 2012 Security deposits. File taxes 2012   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. File taxes 2012 But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. File taxes 2012    If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. File taxes 2012 Include it in your income when you receive it. File taxes 2012 Other Sources of Rental Income Lease with option to buy. File taxes 2012   If the rental agreement gives your tenant the right to buy your rental property, the payments you receive under the agreement are generally rental income. File taxes 2012 If your tenant exercises the right to buy the property, the payments you receive for the period after the date of sale are considered part of the selling price. File taxes 2012 Part interest. File taxes 2012   If you own a part interest in rental property, you must report your part of the rental income from the property. File taxes 2012 Rental of property also used as your home. File taxes 2012   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. File taxes 2012 However, you can deduct on Schedule A (Form 1040), Itemized Deductions, the interest, taxes, and casualty and theft losses that are allowed for nonrental property. File taxes 2012 See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). File taxes 2012 Rental Expenses In most cases, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income. File taxes 2012 Personal use of rental property. File taxes 2012   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. File taxes 2012 Also, your rental expense deductions may be limited. File taxes 2012 See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). File taxes 2012 Part interest. File taxes 2012   If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership. File taxes 2012 Example. File taxes 2012 Roger owns a one-half undivided interest in a rental house. File taxes 2012 Last year he paid $968 for necessary repairs on the property. File taxes 2012 Roger can deduct $484 (50% × $968) as a rental expense. File taxes 2012 He is entitled to reimbursement for the remaining half from the co-owner. File taxes 2012 When To Deduct You generally deduct your rental expenses in the year you pay them. File taxes 2012 If you use the accrual method, see Publication 538 for more information. File taxes 2012 Types of Expenses Listed below are the most common rental expenses. File taxes 2012 Advertising. File taxes 2012 Auto and travel expenses. File taxes 2012 Cleaning and maintenance. File taxes 2012 Commissions. File taxes 2012 Depreciation. File taxes 2012 Insurance. File taxes 2012 Interest (other). File taxes 2012 Legal and other professional fees. File taxes 2012 Local transportation expenses. File taxes 2012 Management fees. File taxes 2012 Mortgage interest paid to banks, etc. File taxes 2012 Points. File taxes 2012 Rental payments. File taxes 2012 Repairs. File taxes 2012 Taxes. File taxes 2012 Utilities. File taxes 2012 Some of these expenses, as well as other less common ones, are discussed below. File taxes 2012 Depreciation. File taxes 2012   Depreciation is a capital expense. File taxes 2012 It is the mechanism for recovering your cost in an income producing property and must be taken over the expected life of the property. File taxes 2012   You can begin to depreciate rental property when it is ready and available for rent. File taxes 2012 See Placed in Service under When Does Depreciation Begin and End in chapter 2. File taxes 2012 Insurance premiums paid in advance. File taxes 2012   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. File taxes 2012 You cannot deduct the total premium in the year you pay it. File taxes 2012 See chapter 6 of Publication 535 for information on deductible premiums. File taxes 2012 Interest expense. File taxes 2012   You can deduct mortgage interest you pay on your rental property. File taxes 2012 When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. File taxes 2012 Chapter 4 of Publication 535 explains mortgage interest in detail. File taxes 2012 Expenses paid to obtain a mortgage. File taxes 2012   Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. File taxes 2012 These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property. File taxes 2012 Form 1098, Mortgage Interest Statement. File taxes 2012   If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098 or similar statement showing the interest you paid for the year. File taxes 2012 If you and at least one other person (other than your spouse if you file a joint return) were liable for, and paid interest on, the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. File taxes 2012 Attach a statement to your return showing the name and address of the other person. File taxes 2012 On the dotted line next to line 13, enter “See attached. File taxes 2012 ” Legal and other professional fees. File taxes 2012   You can deduct, as a rental expense, legal and other professional expenses such as tax return preparation fees you paid to prepare Schedule E, Part I. File taxes 2012 For example, on your 2013 Schedule E you can deduct fees paid in 2013 to prepare Part I of your 2012 Schedule E. File taxes 2012 You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. File taxes 2012 Local benefit taxes. File taxes 2012   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. File taxes 2012 These charges are nondepreciable capital expenditures and must be added to the basis of your property. File taxes 2012 However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. File taxes 2012 Local transportation expenses. File taxes 2012   You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. File taxes 2012 However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. File taxes 2012 See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. File taxes 2012   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. File taxes 2012 For 2013, the standard mileage rate for business use is 56. File taxes 2012 5 cents per mile. File taxes 2012 For more information, see chapter 4 of Publication 463. File taxes 2012    To deduct car expenses under either method, you must keep records that follow the rules in chapter 5 of Publication 463. File taxes 2012 In addition, you must complete Form 4562, Part V, and attach it to your tax return. File taxes 2012 Pre-rental expenses. File taxes 2012   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. File taxes 2012 Rental of equipment. File taxes 2012   You can deduct the rent you pay for equipment that you use for rental purposes. File taxes 2012 However, in some cases, lease contracts are actually purchase contracts. File taxes 2012 If so, you cannot deduct these payments. File taxes 2012 You can recover the cost of purchased equipment through depreciation. File taxes 2012 Rental of property. File taxes 2012   You can deduct the rent you pay for property that you use for rental purposes. File taxes 2012 If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. File taxes 2012 Travel expenses. File taxes 2012   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. File taxes 2012 You must properly allocate your expenses between rental and nonrental activities. File taxes 2012 You cannot deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. File taxes 2012 The cost of improvements is recovered by taking depreciation. File taxes 2012 For information on travel expenses, see chapter 1 of Publication 463. File taxes 2012    To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Publication 463. File taxes 2012 Uncollected rent. File taxes 2012   If you are a cash basis taxpayer, do not deduct uncollected rent. File taxes 2012 Because you have not included it in your income, it is not deductible. File taxes 2012   If you use an accrual method, report income when you earn it. File taxes 2012 If you are unable to collect the rent, you may be able to deduct it as a business bad debt. File taxes 2012 See chapter 10 of Publication 535 for more information about business bad debts. File taxes 2012 Vacant rental property. File taxes 2012   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. File taxes 2012 However, you cannot deduct any loss of rental income for the period the property is vacant. File taxes 2012 Vacant while listed for sale. File taxes 2012   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. File taxes 2012 If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. File taxes 2012 Points The term “points” is often used to describe some of the charges paid, or treated as paid, by a borrower to take out a loan or a mortgage. File taxes 2012 These charges are also called loan origination fees, maximum loan charges, or premium charges. File taxes 2012 Any of these charges (points) that are solely for the use of money are interest. File taxes 2012 Because points are prepaid interest, you generally cannot deduct the full amount in the year paid, but must deduct the interest over the term of the loan. File taxes 2012 The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. File taxes 2012 In this case, points are equivalent to OID, which is the difference between: The amount borrowed (redemption price at maturity, or principal) and The proceeds (issue price). File taxes 2012 The first step is to determine whether your total OID (which you may have on bonds or other investments in addition to the mortgage loan), including the OID resulting from the points, is insignificant or de minimis. File taxes 2012 If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct. File taxes 2012 De minimis OID. File taxes 2012   The OID is de minimis if it is less than one-fourth of 1% (. File taxes 2012 0025) of the stated redemption price at maturity (principal amount of the loan) multiplied by the number of full years from the date of original issue to maturity (term of the loan). File taxes 2012   If the OID is de minimis, you can choose one of the following ways to figure the amount of points you can deduct each year. File taxes 2012 On a constant-yield basis over the term of the loan. File taxes 2012 On a straight line basis over the term of the loan. File taxes 2012 In proportion to stated interest payments. File taxes 2012 In its entirety at maturity of the loan. File taxes 2012 You make this choice by deducting the OID (points) in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. File taxes 2012 Example. File taxes 2012 Carol Madison took out a $100,000 mortgage loan on January 1, 2013, to buy a house she will use as a rental during 2013. File taxes 2012 The loan is to be repaid over 30 years. File taxes 2012 During 2013, Carol paid $10,000 of mortgage interest (stated interest) to the lender. File taxes 2012 When the loan was made, she paid $1,500 in points to the lender. File taxes 2012 The points reduced the principal amount of the loan from $100,000 to $98,500, resulting in $1,500 of OID. File taxes 2012 Carol determines that the points (OID) she paid are de minimis based on the following computation. File taxes 2012 Redemption price at maturity (principal amount of the loan) $100,000 Multiplied by: The term of the  loan in complete years ×30 Multiplied by ×. File taxes 2012 0025 De minimis amount $7,500 The points (OID) she paid ($1,500) are less than the de minimis amount ($7,500). File taxes 2012 Therefore, Carol has de minimis OID and she can choose one of the four ways discussed earlier to figure the amount she can deduct each year. File taxes 2012 Under the straight line method, she can deduct $50 each year for 30 years. File taxes 2012 Constant-yield method. File taxes 2012   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. File taxes 2012   You figure your deduction for the first year in the following manner. File taxes 2012 Determine the issue price of the loan. File taxes 2012 If you paid points on the loan, the issue price generally is the difference between the principal and the points. File taxes 2012 Multiply the result in (1) by the yield to maturity (defined later). File taxes 2012 Subtract any qualified stated interest payments (defined later) from the result in (2). File taxes 2012 This is the OID you can deduct in the first year. File taxes 2012 Yield to maturity (YTM). File taxes 2012   This rate is generally shown in the literature you receive from your lender. File taxes 2012 If you do not have this information, consult your lender or tax advisor. File taxes 2012 In general, the YTM is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. File taxes 2012 Qualified stated interest (QSI). File taxes 2012   In general, this is the stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a fixed rate. File taxes 2012 Example—Year 1. File taxes 2012 The facts are the same as in the previous example. File taxes 2012 The yield to maturity on Carol's loan is 10. File taxes 2012 2467%, compounded annually. File taxes 2012 She figured the amount of points (OID) she could deduct in 2013 as follows. File taxes 2012 Principal amount of the loan $100,000 Minus: Points (OID) –1,500 Issue price of the loan $98,500 Multiplied by: YTM × . File taxes 2012 102467 Total 10,093 Minus: QSI –10,000 Points (OID) deductible in 2013 $93 To figure your deduction in any subsequent year, you start with the adjusted issue price. File taxes 2012 To get the adjusted issue price, add to the issue price figured in Year 1 any OID previously deducted. File taxes 2012 Then follow steps (2) and (3), earlier. File taxes 2012 Example—Year 2. File taxes 2012 Carol figured the deduction for 2014 as follows. File taxes 2012 Issue price $98,500 Plus: Points (OID) deducted  in 2013 +93 Adjusted issue price $98,593 Multiplied by: YTM × . File taxes 2012 102467 Total 10,103 Minus: QSI –10,000 Points (OID) deductible in 2014 $103 Loan or mortgage ends. File taxes 2012    If your loan or mortgage ends, you may be able to deduct any remaining points (OID) in the tax year in which the loan or mortgage ends. File taxes 2012 A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. File taxes 2012 However, if the refinancing is with the same lender, the remaining points (OID) generally are not deductible in the year in which the refinancing occurs, but may be deductible over the term of the new mortgage or loan. File taxes 2012 Points when loan refinance is more than the previous outstanding balance. File taxes 2012   When you refinance a rental property for more than the previous outstanding balance, the portion of the points allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. File taxes 2012 For example, if an individual refinanced a loan with a balance of $100,000, the amount of the new loan was $120,000, and the taxpayer used $20,000 to purchase a car, points allocable to the $20,000 would be treated as nondeductible personal interest. File taxes 2012 Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. File taxes 2012 Improvements. File taxes 2012   You must capitalize any expense you pay to improve your rental property. File taxes 2012 An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. File taxes 2012 Betterments. File taxes 2012   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. File taxes 2012 Restoration. File taxes 2012   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. File taxes 2012 Adaptation. File taxes 2012   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. File taxes 2012 Separate the costs of repairs and improvements, and keep accurate records. File taxes 2012 You will need to know the cost of improvements when you sell or depreciate your property. File taxes 2012 The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. File taxes 2012 Table 1-1. File taxes 2012 Examples of Improvements Additions Bedroom Bathroom Deck Garage Porch Patio  Lawn & Grounds Landscaping Driveway Walkway Fence Retaining wall Sprinkler system Swimming pool Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system   Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances Kitchen modernization Flooring Wall-to-wall carpeting  Insulation Attic Walls, floor Pipes, duct work Prev  Up  Next   Home   More Online Publications
Español

End-of-Life Issues

Get resources on advance directives, hospice, funerals, and more.

The File Taxes 2012

File taxes 2012 4. File taxes 2012   Detailed Examples Table of Contents These examples use actual forms to help you prepare your income tax return. File taxes 2012 However, the information shown on the filled-in forms is not from any actual person or scenario. File taxes 2012 Example 1—Mortgage loan modification. File taxes 2012    In 2007, Nancy Oak bought a main home for $435,000. File taxes 2012 Nancy took out a $420,000 mortgage loan to buy the home and made a down payment of $15,000. File taxes 2012 The loan was secured by the home. File taxes 2012 The mortgage loan was a recourse debt, meaning that Nancy was personally liable for the debt. File taxes 2012 In 2008, Nancy took out a second mortgage loan (also a recourse debt) in the amount of $30,000 that was used to substantially improve her kitchen. File taxes 2012    In 2011, when the outstanding principal of the first and second mortgage loans was $440,000, Nancy refinanced the two recourse loans into one recourse loan in the amount of $475,000. File taxes 2012 The FMV of Nancy's home at the time of the refinancing was $500,000. File taxes 2012 Nancy used the additional $35,000 debt ($475,000 new mortgage loan minus $440,000 outstanding principal of Nancy's first and second mortgage loans immediately before the refinancing) to pay off personal credit cards and to pay college tuition for her son. File taxes 2012 After the refinancing, Nancy has qualified principal residence indebtedness in the amount of $440,000 because the refinanced debt is qualified principal residence indebtedness only to the extent the amount of debt is not more than the old mortgage principal just before the refinancing. File taxes 2012   In 2013, Nancy was unable to make her mortgage loan payments. File taxes 2012 On August 31, 2013, when the outstanding balance of her refinanced mortgage loan was still $475,000 and the FMV of the property was $425,000, Nancy's bank agreed to a loan modification (a “workout”) that resulted in a $40,000 reduction in the principal balance of her loan. File taxes 2012 Nancy was neither insolvent nor in bankruptcy at the time of the loan modification. File taxes 2012   Nancy received a 2013 Form 1099-C from her bank in January 2014 showing canceled debt of $40,000 in box 2. File taxes 2012 Identifiable event code "F" appears in box 6. File taxes 2012 This box shows the reason the creditor has filed Form 1099-C. File taxes 2012 To determine if she must include the canceled debt in her income, Nancy must determine whether she meets any of the exceptions or exclusions that apply to canceled debts. File taxes 2012 Nancy determines that the only exception or exclusion that applies to her is the qualified principal residence indebtedness exclusion. File taxes 2012   Next, Nancy determines the amount, if any, of the $40,000 of canceled debt that was qualified principal residence indebtedness. File taxes 2012 Although Nancy has $440,000 of qualified principal residence indebtedness, part of her loan ($35,000) was not qualified principal residence indebtedness because it was used to pay off personal credit cards and college tuition for her son. File taxes 2012 Applying the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent the amount canceled is more than the amount of the debt (immediately before the cancellation) that is not qualified principal residence indebtedness. File taxes 2012 Thus, Nancy can exclude only $5,000 of the canceled debt as qualified principal residence indebtedness ($40,000 amount canceled minus $35,000 nonqualified debt). File taxes 2012   Because Nancy does not meet any other exception or exclusion, she checks only the box on line 1e of Form 982 and enters $5,000 on line 2. File taxes 2012 Nancy must also enter $5,000 on line 10b and reduce the basis of her main home by the $5,000 she excluded from income, bringing the adjusted basis in her home to $460,000 ($435,000 purchase price plus $30,000 substantial improvement minus $5,000). File taxes 2012 Nancy must also include the $35,000 nonqualified debt portion in income on Form 1040, line 21. File taxes 2012 You can see Nancy's Form 1099-C and a portion of her Form 1040 below. File taxes 2012 Nancy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Form 1099-C, Cancellation of Debt Nancy's 2013 Form 1040 This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Form 1040, U. File taxes 2012 S. File taxes 2012 Individual Income Tax Nancy's Form 982 This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)              Example 2—Mortgage loan foreclosure. File taxes 2012    In 2005, John and Mary Elm bought a main home for $335,000. File taxes 2012 John and Mary took out a $320,000 mortgage loan to buy the home and made a down payment of $15,000. File taxes 2012 The loan was secured by the home and is a recourse debt, meaning John and Mary are personally liable for the debt. File taxes 2012   John and Mary became unable to make their mortgage loan payments and on March 1, 2013, when the outstanding balance of the mortgage loan was $315,000 and the FMV of the property was $290,000, the bank foreclosed on the property and simultaneously canceled the remaining mortgage debt. File taxes 2012 Immediately before the foreclosure, John and Mary's only other assets and liabilities were a checking account with a balance of $6,000, retirement savings of $13,000, and credit card debt of $5,500. File taxes 2012   John and Mary received a 2013 Form 1099-C showing canceled debt of $25,000 in box 2 ($315,000 outstanding balance minus $290,000 FMV) and an FMV of $290,000 in box 7. File taxes 2012 Identifiable event code "D" appears in box 6. File taxes 2012 This box shows the reason the creditor has filed Form 1099-C. File taxes 2012 In order to determine if John and Mary must include the canceled debt in income, they must first determine whether they meet any of the exceptions or exclusions that apply to canceled debts. File taxes 2012 In this example, John and Mary meet both the insolvency and qualified principal residence indebtedness exclusions. File taxes 2012 Their sample Form 1099-C is shown on this page. File taxes 2012   John and Mary complete the insolvency worksheet and determine that they were insolvent immediately before the cancellation because at that time their liabilities exceeded the FMV of their assets by $11,500 ($320,500 total liabilities minus $309,000 FMV of total assets). File taxes 2012 However, because the entire debt canceled is qualified principal residence indebtedness, the insolvency exclusion only applies if John and Mary elect to apply the insolvency exclusion instead of the qualified principal residence exclusion. File taxes 2012   John and Mary do not elect to apply the insolvency exclusion instead of the qualified principal residence exclusion because under the insolvency exclusion their exclusion would be limited to the amount by which they were insolvent ($11,500). File taxes 2012 Instead, John and Mary check box 1e of Form 982 to exclude the canceled debt under the qualified principal residence exclusion. File taxes 2012 Under the qualified principal residence exclusion, the amount that John and Mary can exclude is not limited because their qualified principal residence indebtedness is not more than $2 million and no portion of the loan was nonqualified debt. File taxes 2012 As a result, John and Mary enter the full $25,000 of canceled debt on line 2 of Form 982. File taxes 2012 Because John and Mary no longer own the home due to the foreclosure, John and Mary have no remaining basis in the home at the time of the debt cancellation. File taxes 2012 Thus, John and Mary leave line 10b of Form 982 blank. File taxes 2012   John and Mary must also determine whether they have a gain or loss from the foreclosure. File taxes 2012 John and Mary complete Table 1-1 (shown below) and find that they have a $45,000 loss from the foreclosure. File taxes 2012 Because this loss relates to their home, it is a nondeductible loss. File taxes 2012   John and Mary's Form 1099-C, Insolvency Worksheet, and Form 982 follow. File taxes 2012 John and Mary's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Form 1099-C, Cancellation of Debt Table 1-1. File taxes 2012 Worksheet for Foreclosures and Repossessions (for John and Mary Elm) Part 1. File taxes 2012 Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). File taxes 2012 Otherwise, go to Part 2. File taxes 2012 1. File taxes 2012 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 $315,000. File taxes 2012 00 2. File taxes 2012 Enter the fair market value of the transferred property $290,000. File taxes 2012 00 3. File taxes 2012 Ordinary income from the cancellation of debt upon foreclosure or repossession. File taxes 2012 * Subtract line 2 from line 1. File taxes 2012 If less than zero, enter zero. File taxes 2012 Next, go to Part 2 $ 25,000. File taxes 2012 00 Part 2. File taxes 2012 Gain or loss from foreclosure or repossession. File taxes 2012   4. File taxes 2012 Enter the smaller of line 1 or line 2. File taxes 2012 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 $290,000. File taxes 2012 00 5. File taxes 2012 Enter any proceeds you received from the foreclosure sale   6. File taxes 2012 Add line 4 and line 5 $290,000. File taxes 2012 00 7. File taxes 2012 Enter the adjusted basis of the transferred property $335,000. File taxes 2012 00 8. File taxes 2012 Gain or loss from foreclosure or repossession. File taxes 2012 Subtract line 7 from line 6 ($ 45,000. File taxes 2012 00) * The income may not be taxable. File taxes 2012 See chapter 1 for more details. File taxes 2012 Insolvency Worksheet—John and Mary Elm Date debt was canceled (mm/dd/yy) 03/01/13 Part I. File taxes 2012 Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. File taxes 2012 Credit card debt $ 5,500 2. File taxes 2012 Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 315,000 3. File taxes 2012 Car and other vehicle loans $ 4. File taxes 2012 Medical bills owed $ 5. File taxes 2012 Student loans $ 6. File taxes 2012 Accrued or past-due mortgage interest $ 7. File taxes 2012 Accrued or past-due real estate taxes $ 8. File taxes 2012 Accrued or past-due utilities (water, gas, electric) $ 9. File taxes 2012 Accrued or past-due child care costs $ 10. File taxes 2012 Federal or state income taxes remaining due (for prior tax years) $ 11. File taxes 2012 Judgments $ 12. File taxes 2012 Business debts (including those owed as a sole proprietor or partner) $ 13. File taxes 2012 Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. File taxes 2012 Other liabilities (debts) not included above $ 15. File taxes 2012 Total liabilities immediately before the cancellation. File taxes 2012 Add lines 1 through 14. File taxes 2012 $ 320,500 Part II. File taxes 2012 Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. File taxes 2012 Cash and bank account balances $ 6,000 17. File taxes 2012 Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 290,000 18. File taxes 2012 Cars and other vehicles $ 19. File taxes 2012 Computers $ 20. File taxes 2012 Household goods and furnishings (for example, appliances, electronics, furniture, etc. File taxes 2012 ) $ 21. File taxes 2012 Tools $ 22. File taxes 2012 Jewelry $ 23. File taxes 2012 Clothing $ 24. File taxes 2012 Books $ 25. File taxes 2012 Stocks and bonds $ 26. File taxes 2012 Investments in coins, stamps, paintings, or other collectibles $ 27. File taxes 2012 Firearms, sports, photographic, and other hobby equipment $ 28. File taxes 2012 Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 13,000 29. File taxes 2012 Interest in a pension plan $ 30. File taxes 2012 Interest in education accounts $ 31. File taxes 2012 Cash value of life insurance $ 32. File taxes 2012 Security deposits with landlords, utilities, and others $ 33. File taxes 2012 Interests in partnerships $ 34. File taxes 2012 Value of investment in a business $ 35. File taxes 2012 Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. File taxes 2012 Other assets not included above $ 37. File taxes 2012 FMV of total assets immediately before the cancellation. File taxes 2012 Add lines 16 through 36. File taxes 2012 $ 309,000 Part III. File taxes 2012 Insolvency 38. File taxes 2012 Amount of Insolvency. File taxes 2012 Subtract line 37 from line 15. File taxes 2012 If zero or less, you are not insolvent. File taxes 2012 $ 11,500 John and Mary's Form 982 This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)          Example 3—Mortgage loan foreclosure with debt exceeding $2 million limit. File taxes 2012    In 2011, Kathy and Frank Willow got married and entered into a contract with Hive Construction Corporation to build a house for $3,000,000 to be used as their main home. File taxes 2012 Kathy and Frank made a $400,000 down payment and took out a $2,600,000 mortgage to finance the remaining cost of the house. File taxes 2012 Kathy and Frank are personally liable for the mortgage loan, which is secured by the home. File taxes 2012   In November 2013, when the outstanding principal balance on the mortgage loan was $2,500,000, the FMV of the property fell to $1,750,000 and Kathy and Frank abandoned the property by permanently moving out. File taxes 2012 The lender foreclosed on the property and, on December 5, 2013, sold the property to another buyer for $1,750,000. File taxes 2012 On December 26, 2013, the lender canceled the remaining debt. File taxes 2012 Kathy and Frank have no tax attributes other than basis of personal-use property. File taxes 2012   The lender issued a 2013 Form 1099-C to Kathy and Frank showing canceled debt of $750,000 in box 2 (the remaining balance on the $2,500,000 mortgage debt after application of the foreclosure sale proceeds) and $1,750,000 in box 7 (FMV of the property). File taxes 2012 Identifiable event code "D" appears in box 6. File taxes 2012 This box shows the reason the creditor has filed Form 1099-C. File taxes 2012 Although Kathy and Frank abandoned the property, the lender did not need to also file a Form 1099-A because the lender canceled the debt in connection with the foreclosure in the same calendar year. File taxes 2012 Kathy and Frank are filing a joint return for 2013. File taxes 2012   Because the foreclosure occurred prior to the debt cancellation, Kathy and Frank first calculate their gain or loss from the foreclosure using Table 1-1. File taxes 2012 Because Kathy and Frank remained personally liable for the $750,000 debt remaining after the foreclosure ($2,500,000 outstanding debt immediately before the foreclosure minus $1,750,000 satisfied through the sale of the home), Kathy and Frank enter $1,750,000 on line 1 of Table 1-1 ($2,500,000 outstanding debt immediately before the foreclosure minus the $750,000 for which they remained liable). File taxes 2012 Completing Table 1-1, Kathy and Frank find that they have no ordinary income from the cancellation of debt upon foreclosure and that they have a $1,250,000 loss. File taxes 2012 Because this loss relates to their home, it is a nondeductible loss. File taxes 2012   Because the lender later canceled the remaining amount of the debt, Kathy and Frank must also determine whether that canceled debt is taxable. File taxes 2012 Immediately before the cancellation, Kathy and Frank had $15,000 in a savings account, household furnishings with an FMV of $17,000, a car with an FMV of $10,000, and $18,000 in credit card debt. File taxes 2012 Kathy and Frank also had the $750,000 remaining balance on the mortgage loan at that time. File taxes 2012 The household furnishings originally cost $30,000. File taxes 2012 The car had been fully paid off (so there was no related outstanding debt) and was originally purchased for $16,000. File taxes 2012 Kathy and Frank had no adjustments to the cost basis of the car. File taxes 2012 Kathy and Frank had no other assets or liabilities at the time of the cancellation. File taxes 2012 Kathy and Frank complete the insolvency worksheet to calculate that they were insolvent to the extent of $726,000 immediately before the cancellation ($768,000 of total liabilities minus $42,000 FMV of total assets). File taxes 2012   At the beginning of 2014, Kathy and Frank had $9,000 in their savings account and $15,000 in credit card debt. File taxes 2012 Kathy and Frank also owned the same car at that time (still with an FMV of $10,000 and basis of $16,000) and the same household furnishings (still with an FMV of $17,000 and a basis of $30,000). File taxes 2012 Kathy and Frank had no other assets or liabilities at that time. File taxes 2012 Kathy and Frank no longer own the home because the lender foreclosed on it in 2013. File taxes 2012   Because the canceled debt is qualified principal residence indebtedness, the insolvency exclusion does not apply unless Kathy and Frank elect to apply the insolvency exclusion instead of the qualified principal residence indebtedness exclusion. File taxes 2012 The maximum amount that Kathy and Frank can treat as qualified principal residence indebtedness is $2,000,000. File taxes 2012 The remaining $500,000 ($2,500,000 outstanding mortgage loan minus $2,000,000 limit on qualified principal residence indebtedness) is not qualified principal residence indebtedness. File taxes 2012 Because only a part of the loan is qualified principal residence indebtedness, Kathy and Frank must apply the ordering rule to the canceled debt. File taxes 2012 Under the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent that the amount canceled ($750,000) exceeds the amount of the loan (immediately before the cancellation) that is not qualified principal residence indebtedness ($500,000). File taxes 2012 This means that Kathy and Frank can only exclude $250,000 ($750,000 amount canceled minus $500,000 nonqualified debt) under the qualified principal residence indebtedness exclusion. File taxes 2012   Kathy and Frank do not elect to have the insolvency exclusion apply instead of the qualified principal residence exclusion. File taxes 2012 Nonetheless, they can still apply the insolvency exclusion to the $500,000 nonqualified debt because it is not qualified principal residence indebtedness. File taxes 2012 Kathy and Frank can exclude the remaining $500,000 canceled debt under the insolvency exclusion because they were insolvent immediately before the cancellation to the extent of $726,000. File taxes 2012 Thus, Kathy and Frank check the boxes on lines 1b and 1e of Form 982 and enter $750,000 on line 2 ($250,000 excluded under the qualified principal residence indebtedness exclusion plus $500,000 excluded under the insolvency exclusion). File taxes 2012   Next, Kathy and Frank reduce their tax attributes using Part II of Form 982. File taxes 2012 Because Kathy and Frank no longer own the home due to the foreclosure, Kathy and Frank have no remaining basis in the home at the time of the debt cancellation. File taxes 2012 Thus, Kathy and Frank leave line 10b of Form 982 blank. File taxes 2012 However, Kathy and Frank are also excluding nonqualified debt under the insolvency exclusion. File taxes 2012 As a result, Kathy and Frank must reduce the basis of property they own based on the amount of canceled debt they are excluding from income under the insolvency rules. File taxes 2012 Because Kathy and Frank have no tax attributes other than basis of personal-use property to reduce, Kathy and Frank figure the amount they must include on line 10a of Form 982 by taking the smallest of: The $46,000 bases of their personal-use property held at the beginning of 2014 ($16,000 basis in the car plus $30,000 basis in household furnishings), The $500,000 of the nonbusiness debt (other than qualified principal residence indebtedness) that they are excluding from income on line 2 of Form 982, or The $43,000 excess of the total bases of the property and the amount of money they held immediately after the cancellation over their total liabilities immediately after the cancellation ($15,000 in savings account plus $30,000 basis in household furnishings plus $16,000 adjusted basis in car minus $18,000 credit card debt). File taxes 2012 Kathy and Frank enter $43,000 on Form 982, line 10a and reduce their bases in the car and the household furnishings in proportion to the total adjusted bases in all their property. File taxes 2012 Kathy and Frank reduce the basis in the car by $14,956. File taxes 2012 52 ($43,000 x $16,000/$46,000). File taxes 2012 And they reduce the basis in the household furnishings by $28,043. File taxes 2012 48 ($43,000 x $30,000/$46,000). File taxes 2012   Following are Kathy and Frank's sample forms and worksheets. File taxes 2012 Frank and Kathy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Form 1099-C, Cancellation of Debt Table 1-1. File taxes 2012 Worksheet for Foreclosures and Repossessions (for Frank and Kathy Willow) Part 1. File taxes 2012 Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). File taxes 2012 Otherwise, go to Part 2. File taxes 2012 1. File taxes 2012 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 $1,750,000. File taxes 2012 00 2. File taxes 2012 Enter the fair market value of the transferred property $1,750,000. File taxes 2012 00 3. File taxes 2012 Ordinary income from the cancellation of debt upon foreclosure or repossession. File taxes 2012 * Subtract line 2 from line 1. File taxes 2012 If less than zero, enter zero. File taxes 2012 Next, go to Part 2 $0. File taxes 2012 00 Part 2. File taxes 2012 Gain or loss from foreclosure or repossession. File taxes 2012   4. File taxes 2012 Enter the smaller of line 1 or line 2. File taxes 2012 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. File taxes 2012 $1,750,000. File taxes 2012 00 5. File taxes 2012 Enter any proceeds you received from the foreclosure sale   6. File taxes 2012 Add line 4 and line 5 $1,750,000. File taxes 2012 00 7. File taxes 2012 Enter the adjusted basis of the transferred property $3,000,000. File taxes 2012 00 8. File taxes 2012 Gain or loss from foreclosure or repossession. File taxes 2012 Subtract line 7 from line 6 ($1,250,000. File taxes 2012 00) * The income may not be taxable. File taxes 2012 See chapter 1 for more details. File taxes 2012    Insolvency Worksheet—Frank and Kathy Willow Date debt was canceled (mm/dd/yy) 12/26/13 Part I. File taxes 2012 Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. File taxes 2012 Credit card debt $ 18,000 2. File taxes 2012 Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 750,000 3. File taxes 2012 Car and other vehicle loans $ 4. File taxes 2012 Medical bills owed $ 5. File taxes 2012 Student loans $ 6. File taxes 2012 Accrued or past-due mortgage interest $ 7. File taxes 2012 Accrued or past-due real estate taxes $ 8. File taxes 2012 Accrued or past-due utilities (water, gas, electric) $ 9. File taxes 2012 Accrued or past-due child care costs $ 10. File taxes 2012 Federal or state income taxes remaining due (for prior tax years) $ 11. File taxes 2012 Judgments $ 12. File taxes 2012 Business debts (including those owed as a sole proprietor or partner) $ 13. File taxes 2012 Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. File taxes 2012 Other liabilities (debts) not included above $ 15. File taxes 2012 Total liabilities immediately before the cancellation. File taxes 2012 Add lines 1 through 14. File taxes 2012 $ 768,000 Part II. File taxes 2012 Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. File taxes 2012 Cash and bank account balances $ 15,000 17. File taxes 2012 Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 18. File taxes 2012 Cars and other vehicles $ 10,000 19. File taxes 2012 Computers $ 20. File taxes 2012 Household goods and furnishings (for example, appliances, electronics, furniture, etc. File taxes 2012 ) $ 17,000 21. File taxes 2012 Tools $ 22. File taxes 2012 Jewelry $ 23. File taxes 2012 Clothing $ 24. File taxes 2012 Books $ 25. File taxes 2012 Stocks and bonds $ 26. File taxes 2012 Investments in coins, stamps, paintings, or other collectibles $ 27. File taxes 2012 Firearms, sports, photographic, and other hobby equipment $ 28. File taxes 2012 Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 29. File taxes 2012 Interest in a pension plan $ 30. File taxes 2012 Interest in education accounts $ 31. File taxes 2012 Cash value of life insurance $ 32. File taxes 2012 Security deposits with landlords, utilities, and others $ 33. File taxes 2012 Interests in partnerships $ 34. File taxes 2012 Value of investment in a business $ 35. File taxes 2012 Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. File taxes 2012 Other assets not included above $ 37. File taxes 2012 FMV of total assets immediately before the cancellation. File taxes 2012 Add lines 16 through 36. File taxes 2012 $ 42,000 Part III. File taxes 2012 Insolvency 38. File taxes 2012 Amount of Insolvency. File taxes 2012 Subtract line 37 from line 15. File taxes 2012 If zero or less, you are not insolvent. File taxes 2012 $ 726,000    Frank and Kathy's Form 982 This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Prev  Up  Next   Home   More Online Publications