VERY important news for homeowners in distress--
CRITICAL you take action NOW!!!!
from
Janell A. Israel & Associates
1585 Kapiolani Blvd., Suite 1604, Honolulu, Hawaii 96814 Phone: 808-942-8817
July 2012 Tax Newsletter
Cancelled Debt May be Considered Taxable Income by the IRS
With the
recent economic downturns experienced by many taxpayers, there is a tax
concept that is very important: cancellation of debt. You would think
that the cancellation of debt by a credit card company or mortgage
company would be a good thing for the taxpayer. And it can be, but it
can also be considered taxable income by the IRS. Here is a quick review
of various debt cancellation situations.
* Consumer debt
If you have gone through some type of credit "workout" program on consumer debt, it's likely that some of your debt has been cancelled. If that is the case, be prepared to receive IRS Form 1099-C representing the amount of debt cancelled. The IRS considers that amount taxable income to you, and they expect to see it reported on your tax return. The exception is if you file for bankruptcy. With bankruptcy, generally the debt cancelled is not taxable.
If you have gone through some type of credit "workout" program on consumer debt, it's likely that some of your debt has been cancelled. If that is the case, be prepared to receive IRS Form 1099-C representing the amount of debt cancelled. The IRS considers that amount taxable income to you, and they expect to see it reported on your tax return. The exception is if you file for bankruptcy. With bankruptcy, generally the debt cancelled is not taxable.
Even
if you are not legally bankrupt, you might be technically insolvent
(where your liabilities exceed your assets). If this is the case, you
can exclude your debt cancellation income by reporting your financial
condition and filing IRS Form 982 with your tax return.
* Primary home
If your home is "short" sold or foreclosed and the lender receives less than the total amount of the outstanding loan, you can also expect that amount of debt cancellation to be reported to you and the IRS. But special rules allow you to exclude up to $2 million in cancellation income in many circumstances. You will again need to complete IRS Form 982, but the exclusion from taxable income brought about by the debt cancellation on your primary residence is incredibly liberal. So make sure to take advantage of these rules should they apply to you.
If your home is "short" sold or foreclosed and the lender receives less than the total amount of the outstanding loan, you can also expect that amount of debt cancellation to be reported to you and the IRS. But special rules allow you to exclude up to $2 million in cancellation income in many circumstances. You will again need to complete IRS Form 982, but the exclusion from taxable income brought about by the debt cancellation on your primary residence is incredibly liberal. So make sure to take advantage of these rules should they apply to you.
* Second home, rental property, investment property, business property
The
rules for debt cancellation on second homes, rental property, and
investment or business property can be extremely complicated. Generally
speaking, the new laws that cover debt cancellation don't apply to these
properties, and the IRS considers any debt cancellation income taxable.
Nevertheless, given your cost of these properties, your financial
condition, and the amount of debt cancelled, it's still possible to have
this debt cancellation income taxed at a preferred capital gains rate,
or even considered not taxable at all.
Be aware that many of the special debt cancellation provisions are set to expire at the end of 2012.
If
you're unsure as to how debt cancellation affects you, contact your tax
advisor (or ask us for a referral) to review your situation and
determine how much, if any, cancelled debt will be taxable income to
you.
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