Cancelled Debt Anyone…

What is Form 1099-C?

A Form 1099-C is used to report cancellation of debt of an individual or business from a taxpayer’s rental property, business debt, personal debt or personal residence. A financial institution is required to issue a taxpayer a 1099-C if it forgives or writes off more than $600 of the debt’s principal.

To give you an example of when this form would be issued. Say you had credit card debt of $10,000, you call the credit card company and settle to pay $6,000. The credit card company will then issue you a 1099-C for $4,000.

Is Cancellation of Debt income always taxable?

Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

• Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
• Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
• Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets. To figure out if you are able to report an exclusion – Form 982 must be completed.
• Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.
• Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.

If I have a tenant who doesn’t pay rent can I issue them a 1099-C?

Technically, no, a 1099-C is only to be issued by lenders or financial institutions.

Please feel free to contact Kam Wiese, CPA at Kluge and Wiese LLP (402) 332-3387 or email kamwiesecpa@gmail.com if you have additional questions.

To meet the recently established requirements of the Internal Revenue Service as described in their circular 230 we hereby advise you that any tax advice contained in this communication was not intended or written to be used, and it cannot be used, for the purpose of avoiding penalties that may be imposed on the taxpayer by Internal Revenue Code.