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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:
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. You can do this 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 (FMV) of all your assets.
You might be able to exclude the cancellation of debt income if both of these apply:
Qualified debt is acquisition indebtedness up to:
Acquisition indebtedness is debt incurred to buy, build, or improve your home. You must own the home and use it as your main home.