IRS Form 982. How does it work?

Question

I am doing a short sale on my house. The amt of debt forgiven will be about $100K. The lender will give me a 1099 for taxes on the 100K. Will Form 982 waive these taxes? How does it work? Do I have to qualify in some way?

Answer 1

The important consideration is your financial status at the time the debt is forgiven. You will need to compute your net worth at that time, or have declared bankruptcy.

If you are bankrupt, you are not subject to income tax on the cancelled debt.

If you are not bankrupt, you have to prove that you had negative net worth. You are not subject to income tax on cancelled debt up to the amount of your negative net worth. In other words, if your net worth is -$50K, up to $50K of cancelled debt is not subject to income tax.

Attach the documentation showing bankruptcy or insolvency to Form 982 to figure how much of the cancelled debt is not subject to tax.

Any amount of cancelled debt which is subject to tax goes on Line 21 Other Income of Form 1040.

Answer 2

Yes, you'd have to qualify in order to exclude the forgiven amount from being taxed. The most common way is by proving you were insolvent at the time. You might or might not qualify.

The year you file your return for this would be a real good time to have a CPA (NOT H&R Block or Jackson Hewett) to your taxes.