Your Tax Question - 028

Dear John, I filed my tax return nice and early this year because I thought it would be nice and straight forward this year. After I patted myself on the back and let out a deep sigh of relief for having filed my taxes so early, I got a form 1099-A from our former mortgage company because they sold our house which they foreclosed on. The 1099-A has the ending balance of our loan which was $100,000.00, and the "fair market value" of $50000. It states that "If the fair market value is less than the principal outstanding, and your debt is canceled, you may have cancellation of debt income. If the property was your main home, see Pub. 523, Selling Your Home, to figure any taxable gain or ordinary income." As far as I can tell, we're not liable for any additional taxes because we went through a bankruptcy and this was our principal residence. The best conclusion I can see is that I have to submit an amended return and attach form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness just to say that it was our principal residence. But I don't know what number to use as the amount. The full principal outstanding? The fair market value? Or the difference between the two? I don't know if you'll have a simple answer for me or if you'll really need to look at my stuff. If you want I can hire you to help me and I can bring all my stuff and come see you. Sincerely, Monica
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Hi Monica,

You're basically correct in what needs to happen.

1. Your taxable gain due to the Discharge of Debt is your loan balance (100k) less the fair market value (50k) which equals your taxable gain (50k).
2. But your gain is not taxable because it was you primary home. So you will report this discharge on a Form 982 explaining that it was not taxable for this reason.
3. Since you have already filed your 2009 taxes you will need to do a Form 1040X to explain why you need to include your 982. Since it does not affect your figures it will be a fairly straight forward fix.

I hope this helps,
John

PS. I am happy to help you further should you require my assistance. email me