If I have a Form 1099-C cancellation of debt from my second mortgage. Is the 1099-C cancellation of debt the only record needed to considered a cancelled debt?
Yes, Form 1099-C cancellation of debt reports the actual cancellation of debt. Receiving your 1099-C cancellation of debt notice usually results in more 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:
- You're insolvent.
- 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. 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:
- Your second mortgage was on your main home.
- You used the proceeds to improve the home.
Qualified debt is acquisition indebtedness up to:
- $1 million
- $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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