Homes and Attributes

Today TaxMama hears from Cathy in the TaxQuips Forum with this question. “Are taxpayers required to file Form 982 when their Principal Residence is foreclosed on? If so, would they check off Part 1, 1e “Discharge of qualified principal residence indebtedness”? If the Cancellation of Debt for a foreclosure is a principal residence, attributes do not become part of the equation, correct?”

 

Dear Cathy,

Yes, I would recommend that you use Form 982 to either show why the foreclosure is not taxable, or to reduce tax attributes for cancellation of debt, or to indicate just how much of that cancellation of debt IS taxable.

The fact that this is a personal residence does mean there is no cancellation of debt income. Thanks to The Mortgage Debt Relief Act of 2007, to avoid facing those additional taxes, the debt being canceled must be:

1) The original loan on the home – not refinanced.

2) If refinanced, it must be acquisition debt – i.e. no more than the original loan balance. (The homeowner paid the new points and lending fees out of pocket – which rarely happens.)

3) Or it must be a non-recourse loan.

Otherwise, the homeowners may find themselves facing cancellation of debt income. We’ve talked about this several times before. And IRS explains it on this page.

And yes, reduction of attributes does come into play, even on personal residences. When you use insolvency to avoid some of the cancellation of debt income, you are also going to reduce tax attributes and/or basis of assets up to the amount of cancelled debt that is not taxed.

Incidentally, I have no idea what line to check on Form 982. You have to look at each case individually. Certainly if the mortgage debt has been refinanced and is not

“qualified principal residence indebtedness”, you won’t say that it is, right? It’s complicated. Really, it is.

 And remember, you can find answers to all kinds of questions about foreclosures, cancellation of debt, and other tax issues, free. Where? Where else? At www.TaxMama.com.

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