If I have a Form 1099-C from my second mortgage, is that considered a cancelled debt?
Yes. Form 1099-C reports the cancellation of debt. Cancellation of debt usually results in taxable income. You'll report it on Form 1040 as other income. You might be able to exclude the cancellation of debt income if one of these applies:
The debt was discharged in bankruptcy.
The debt was qualified main home indebtedness.
If you can exclude the income, file Form 982 to report the exclusion and reduce your basis in the property.
Under the insolvency exclusion, you can exclude the cancellation of debt from income to the extent you're insolvent immediately before the debt is cancelled. Insolvency is the amount by which all of your liabilities are more than the fair market value of all your assets.
If your second mortgage was on your main home and you used the proceeds to improve the home, you might be able to exclude the cancellation of debt income. Qualified debt is acquisition indebtedness up to $1,000,000, or $500,000 if you're married filing separately. Acquisition indebtedness is debt incurred to buy, build, or improve your home. You must own the home and use it as your main home.
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This advice is for general information purposes only and may not apply to you. Every tax situation is different. This is not intended to be legal advice. Taxpayers should consult an H&R Block Tax Professional regarding their individual tax situation.