‘debt forgiveness taxes’ Tagged Posts

Cancellation of Indebtedness – Do I Need a CPA?

I see people all the time who are going through a short sale or foreclosure, have a potential income tax problem, and then try to tackle the tax issue...

 

I see people all the time who are going through a short sale or foreclosure, have a potential income tax problem, and then try to tackle the tax issue themselves.  In many cases it may not result in a tax liability, but you should always have a CPA or other tax or legal professional review your transaction and prepare your taxes.  The added cost will be money well spent and also give you piece of mind down the road.

If you had a foreclosure or short sale during the year, you will most likely receive a 1099-A or 1099-C at the end of the year.  These forms will show the amount of debt cancelation and the fair value of any property given up. You should review the 1099 carefully and make sure to notify the lender immediately if any of the information shown is incorrect or incomplete.  You must pay particular attention to the amount of cancellation of indebtedness and the value listed for the real property.

You should review your 1099s with a CPA or other tax or legal professional to determine if the cancellation of indebtedness can be excluded from your taxable income.  In some situations, you will need to determine if you were insolvent at the time of the cancellation of debt.

Specifically, a tax professional can help you with the following:

  • Analyzing the 1099 for errors and inconsistencies;
  • Calculating the gain or loss (if applicable) from the disposition of the property;
  • Determining if you meet the cancellation of debt exclusions;
  • Calculating insolvency at the debt cancelation date (if applicable); and
  • Completing the required tax schedules and forms.

Trust me – the money spent working with a tax professional will be well worth it.  This area of income tax law is very complex and the potential tax impact is too large to deal with someone who doesn’t know what they are doing or could treat it incorrectly and give you problems with the IRS!

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