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Julie M. Sturgeon: Make sure you have a 1099-C, if you need one

It's Your Money

Posted: March 31, 2010 10:26 p.m.
Updated: April 1, 2010 4:30 a.m.
If you borrowed money that your lender says you no longer have to repay, you may have received a tax information statement you’ve never seen before: Form 1099-C, which lenders send to you and to the IRS showing the amount of the cancelled debt — an amount that may be taxable income to you.

For instance, under present federal law, debt forgiven on loan proceeds you used to buy, build or improve your main residence (up to a maximum of $2 million) is generally not taxable. That’s also true when the forgiveness involves debt you incurred to refinance a loan used for those purposes.

So what if you’re sure you’re not going to owe tax, since the forgiven debt is a result of a foreclosure or mortgage restructuring on your home? Do you need to report anything?

In most cases, the answer is yes. Why? One reason: Though certain cancelled debt can be excluded from income, the exclusion is not automatic. You have to attach Form 982 to your federal income tax return to claim the tax relief and to show the amount you can exclude.

In addition to mortgage debt relief, you may qualify for other exceptions that make the cancelled debt reported on Form 1099-C nontaxable, such as insolvency or a cancellation resulting from non-recourse debt.

The federal law passed in 2007 and is in effect until the 2012 tax year on primary residences for short sales, foreclosures and loan modifications.

California law only conformed to federal tax rules for 2007 and 2008. As far as 2009, the law has not been extended.

Recently the state Legislature approved a bill that would bring California in conformity with federal law on debt cancellation and sent it to the governor for a signature. Unfortunately, due to other provisions included in the bill, the governor did not sign it.

There is an expectation that legislators will put together a separate bill to this the mortgage debt cancellation relief issue in the event of a veto, but so far nothing has emerged.

Filing an extension until Oct. 15 if you owe state taxes on cancelled debt to the state may be a plan of action. However, in doing so, paying the amount you think you may owe is recommended. You do run the risk that the legislation does not occur and then you will owe penalties and interest in addition to the tax.

Julie M. Sturgeon is a certified public accountant in Valencia specializing in individual and business tax issues. Her column represents her own views and not necessarily those of The Signal. “It’s Your Money” appears Thursdays and rotates between a handful of the valley’s financial professionals.


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