Form 1099-C in Translation
Phew! What a relief not to have that debt anymore. But even though you didn’t received actual money, you still may have to pay income tax on the cancelled debt.
If a lender cancels a debt, you may receive a Form 1099-C with your name on it. This form gives you lots of helpful information – if you know how to read it. Here, we will deconstruct form 1099-C, box by box, so you can properly use it to your advantage when filing your tax return:
Box 1: DATE
The date the lender cancelled your debt. This date is really important if you think you qualify for the insolvency exclusion. If you’re insolvent the day before the day in this box, some or all of the cancelled debt may not be taxable to you. Look at all your debts owed and if they are higher than the value of your assets owned on that date, you may qualify for the insolvency exclusion. This means the cancellation of debt income is not included in your taxable income, but you will want to report the exclusion by filling out Form 982.
Box 2: AMOUNT OF DEBT CANCELLED
Shows the amount of debt cancelled. This figure should be checked and re-checked! If you don’t agree with this amount, contact the lender.
Box 3: INTEREST
Shows interest cancelled if it was included in the cancelled debt in box 2. If you have an amount in this box, think about whether it would have been deductible if you paid the interest. For example, if this would have qualified to be deductible mortgage interest on your home had you paid it, then this interest reduces your overall taxable cancellation of debt income.
Box 4: DESCRIPTION
Shows a description of the debt, such as mortgage debt on a home or credit card debt.
Box 5: RECOURSE OR NON-RECOURSE
Tells you whether the debt cancelled was recourse (marked yes) or non-recourse (marked no). If there’s an amount in box 7, this will help you figure out the sales price.
Box 6: DEBT CANCELLED IN A BANKRUPCY PROCEEDING
If this box is checked, the debt was cancelled in a bankruptcy proceeding. This means the cancellation of debt income won’t be subject to income tax because of the bankruptcy exclusion. You must report this exclusion on Form 982 if the debt was cancelled in a bankruptcy Chapter 12 or 13.
Box 7: SALE OF PROPERTY TO REPORT
If the creditor repossessed the property described in box 4, this box says you also have the sale of the property to report on your return. You will compare your basis of the property with the amount realized on the property. If box 5 is marked yes, the amount realized is the amount in box 7.
The amount in box 2 (or box 2 minus box 3, if the amount in box 3 would have been deductible had you paid it) is taxable income unless you qualify for an exclusion, such as insolvency or bankruptcy (box 6). If you have an amount in box 7, you may also have to report the sale in the right place on your return, like on Schedule D if the home was for personal or investment use.
Now, you are no longer a Form 1099-C newbie because you have this cheat sheet!
Editor’s Note: This post was updated on July 20, 2016.