Debt Reduction Help

You have a mess on your hands.

On the mortgages, have you gotten the 1099-Cs yet? If no, you don’t mess with the form 982 yet. If you have gotten only the 1099-A, you need to report the “sales.” The main home on schedule D (losses not deductible) and the rental property on schedule 4797. How much you “sold” the properties for depends on whether it says the borrow is liable. If yes, use the smaller amount. If no, use the DEBT amount.

When you get the 1099-Cs (and you’ll have already gotten one for the credit cards), then you look at form 982.

If you are in bankruptcy, check 1a. If you lost your primary residence due to foreclosure, you *might* be able to check box 1e, otherwise both rental and credit cards are part of 1b.

To qualify under 1b, you must prove you are insolvent. Step one, make a list of all your assets (at FMV) and debts just before the 1099-Cs were issued. *IF* you had liquidated everything, would you have still owed anybody? If yes, you are insolvent and the difference is how much you are insolvent by. (You can exlude this much debt on the form 982.) Step two, day after the cancellation, redo the lists for remaining assets and debt, but list the assets at your cost basis. If you are still “insolvent” then you stop as you’ve reached the limit. If your assets are worth more than your debt, then you start reducing the assets (line 10A) until either you have equalized the paper value with the remaining debts or you’ve accounted for all of the excluded amount. Then, later, when you sell any item, you use this new cost basis to determine gain and if you have a gain, put the gain on that year’s 1040 line 21, as other income.

To qualify on line 1E, this has to be your primary residence and you have to show that the mortgage met the standards (you didn’t refinance and cash out), that you meet the 2/5 year rule for living in the house, etc. Then you use line 10B to change the cancelled debt to a reduced basis in the house. This generally works in your favor.