Canceled Debt 

When a commercial lender cancels or forgives a debt that you owe, in order to claim the loss as a tax deduction in its accounting books your lender will issue you an IRS Form 1099-C (cancellation of debt attributed as income).

Canceled Debt as Income in San Diego

A 1099C is frequently issued by a sold-out junior lienholder after a foreclosure or by a lender after a short sale.  After a foreclosure, your lender may issue a 1099C without you having a say in the matter.  If you are doing a short sale, you can try to negotiate with your lender to not issue you a 1099C, however many lenders will insist that they must issue a 1099C after a short sale.  If you have received a 1099-C for canceled debt as income in San Diego, you have options for dealing with taxes on canceled debt.

Taxes Owed on Canceled Debt

You will generally owe a tax debt on the canceled or forgiven debt.  The canceled debt is treated as your income on which you will owe income tax.

Generally, unless you can meet an exception to the rule, the canceled debt will be treated as your income for tax purposes. You will have to pay taxes on the canceled debt just as if the canceled debt was actual income that you earned during the year.

Exceptions to 1099C Tax Liability

Bankruptcy is an exception to 1099C tax liability.  When you file bankruptcy on taxes assessed in a Form 1099C. your tax liability reflected in a 1099C will be eliminated.

There are other exceptions, such as the Qualified Principal Residence Indebtedness exception created by the Mortgage Debt Relief Act of 2007, a temporary special relief for qualifying debt (example, debt forgiven as a result of a modification or restructuring of your principal residence) canceled or forgiven in calendar years 2007 through 2012.

A full discussion of the cancellation of debt income, and exceptions to the rule, can be found in IRS Publication 4681. This publication contains a detailed explanation of cancellation of debt income as well as helpful examples.