If the 1099C Box 7 FMV amount is greater than the Box 2 total debt forgiven amount does the 1099C still need to be entered since the taxable amount would be capital gains

[Carl]

The amount in box 2 is reportable income to you, regardless of the amount in box 7. You have to report it on your tax return. Weather it's taxable or not is another matter. But you are required to report it. Period.

[william-russell1]

CARL is completely incorrect.

IRS Topic 431 and IRS Publication 4681 Page 4 & Page 12-13 if the debt discharged amount is the same or LESS than the FMV of the property then their is no COD income to report. There could be a tax on any gains.

I am posting from the topic and publication below with most relevant information in bold.

IRS Topic No. 431

Caution: If property secured your debt and the creditor takes that property in full or partial satisfaction of your debt, you're treated as having sold that property to the creditor. Your tax treatment depends on whether you were personally liable for the debt (recourse debt) or not personally liable for the debt (nonrecourse debt).

If your property was subject to a recourse debt, your amount realized is the fair market value (FMV) of the property. Your ordinary income from the cancellation of the debt is the amount of the debt in excess of the FMV of the property that the lender forgives. You must include this cancellation of debt in your income unless an exception or exclusion, discussed below, applies. The difference between the FMV and your adjusted basis (usually your cost) will be gain or loss on the disposition of the property.

IRS Publication 4681: Page 4 & 12-13

"Sales or Other Dispositions
(Such as Foreclosures and
Repossessions)
Recourse debt. If you owned property that
was subject to a recourse debt in excess of the
FMV of the property, the lender's foreclosure or
repossession of the property is treated as a sale
or disposition of the property by you and may
result in your realization of gain or loss. The
gain or loss on the disposition of the property is
measured by the difference between the FMV
of the property at the time of the disposition and
your adjusted basis (usually your cost) in the
property. The character of the gain or loss (such
as ordinary or capital) is determined by the
character of the property.

If the lender forgives
all or part of the amount of the debt in excess of
the FMV of the property, the cancellation of the
excess debt may result in ordinary income. The
ordinary income from the cancellation of debt
(the excess of the canceled debt over the FMV
of the property) must be included in your gross
income reported on your tax return unless one
of the exceptions or exclusions described later
applies. For more details, see Exceptions and
Exclusions, later.

With that said there would be no 1099C cod income to report since the debt discharged amount doesnt exceed the FMV amount of the property but there would need to be a schedule D capital gain or loss to report the sale to the IRS. Exclusions and Exemptions on Form 982 doesn't apply in this case

[william-russell1]

I am posting from the topic and publication below with most relevant information in bold.

IRS Topic No. 431

Caution: If property secured your debt and the creditor takes that property in full or partial satisfaction of your debt, you're treated as having sold that property to the creditor. Your tax treatment depends on whether you were personally liable for the debt (recourse debt) or not personally liable for the debt (nonrecourse debt).

If your property was subject to a recourse debt, your amount realized is the fair market value (FMV) of the property. Your ordinary income from the cancellation of the debt is the amount of the debt in excess of the FMV of the property that the lender forgives. You must include this cancellation of debt in your income unless an exception or exclusion, discussed below, applies. The difference between the FMV and your adjusted basis (usually your cost) will be gain or loss on the disposition of the property.

IRS Publication 4681: Page 4 & 12-13

"Sales or Other Dispositions
(Such as Foreclosures and
Repossessions)
Recourse debt. If you owned property that
was subject to a recourse debt in excess of the
FMV of the property, the lender's foreclosure or
repossession of the property is treated as a sale
or disposition of the property by you and may
result in your realization of gain or loss. The
gain or loss on the disposition of the property is
measured by the difference between the FMV
of the property at the time of the disposition and
your adjusted basis (usually your cost) in the
property. The character of the gain or loss (such
as ordinary or capital) is determined by the
character of the property.

If the lender forgives
all or part of the amount of the debt in excess of
the FMV of the property, the cancellation of the
excess debt may result in ordinary income. The
ordinary income from the cancellation of debt
(the excess of the canceled debt over the FMV
of the property) must be included in your gross
income reported on your tax return unless one
of the exceptions or exclusions described later
applies. For more details, see Exceptions and
Exclusions, later.

With that said there would be no 1099C cod income to report since the debt discharged amount doesnt exceed the FMV amount of the property but there would need to be a schedule D capital gain or loss to report the sale to the IRS. Exclusions and Exemptions on Form 982 doesn't apply in this case

[ThomasM125]

I suggest you enter it in TurboTax on form 982, "Reduction of tax attributes due to discharge of indebtedness." You will find it in the desktop version of TurboTax, by clicking on "Forms" and then querying form 982.

There is a "cancelled debt worksheet" on the form you can complete to determine if you can exclude the cancelled debt from taxation.

[william-russell1]

Tom thanks for the reply but no exclusions on form 982 apply. It isnt a real "business" property, it's not a main home, or farm. Insolvency and bankruptcy also dont apply.

[DaveF1006]

What type of a property is it?

[william-russell1]

It's a deeded timeshare so other real property by IRS standards.

[AlexanderS08]

The income is ordinary income. Unfortunately, it will not receive preferential capital gains rates.

That being said, there are several ways you can exclude the income so I would advise you to review those exclusion criteria to see if that might be an option.

@William-Russel1

[jero20]

So Im confused by this post. I have been doing a lot of reading including Audit guidelines for the IRS and i still cant find the same answer anywhere lol. So I'm in the same spot as orignal poster, I have 1099-C for Disney Timeshare, the debt cancelled was around 55K, but the FMV value listed on box 7 is 65K. Wouldn't that mean that i dont need to report it since 65K is greater than 55K?

[william-russell1 · Accepted solution]

From multiple CPA's in my office giving guidance along with myself if the FMV exceeds the debt discharged amount then there is no income to report. IRS Publication 4681 Page 4 Foreclosures & Repossessions - The recourse debt paragraph is where you will find it. As I assume Block 5 is checked on your 1099C? If it isnt then its non recourse and you 100% wouldnt have any income to report. There is also an income worksheet to determine any ordinary income on page 12-13 in IRS Pub 4681.

You would take the debt discharged amount minus the FMV amount and if its 0 or less then there is no ordinary income to report. Examples: Say your FMV was 55k and the debt discharged was 65k then you would have 10k of ordinary income to report but vice versa FMV is 65k and debt discharged is 55k then its 0.

Form 982 exclusions (unless you are insolvent or the debt was discharged in bankruptcy) wouldn't apply so don't listen to the guys above. The advice above is dangerous because granted most 1099C's not related to real property would result in ordinary income to be reported unless exclusions apply but merely giving that advice blindly to every situation just because a 1099C was issued is inaccurate and incorrect.

IRS topic 431 specifically addresses this and states that if property secured your debt and the creditor takes the property in full or partial satisfaction of your debt then you are treated as if you sold that property to the creditor. If any discharged debt is in "excess" of the FMV of the property then the amount in "excess" is treated as ordinary income.

IRS Pub 4681 and Topic 431 doesn't just specify main home as it says "any" debt secured by property. Now to get form 982 exclusions or exceptions on any discharged debt amount in "excess" of the FMV of said property then there is specificity relating to farm, business real property, insolvency, bankruptcy or primary residence but no form 982 exclusions or main home exceptions apply in this situation but since your FMV exceeds the amount of debt discharge  then there is no income to report.

In your case you will need to report the "sale" as a schedule D to show the IRS any realized gain or loss from the disposition. Losses in your case are not deductible but any gain would result in tax on that gain. Topic 431 and IRS Pub 4681 also state how to determine any realized gain you might or might not have. You would need to know your total basis in the timeshare property to accurately determine that.

I would however keep all the paperwork related to the deed in lieu/forclosure just incase the IRS sends a letter asking for information regarding your figures. Most deed in lieu assuming that was your case actually have a sales worksheet in them as if you were selling your home.

If you are REALLY concerned about showing the 1099C amount on Schedule 1 Line 8 - Other Income & Adjusments to Income then:

You can report the 1099C amount as a 1099-MISC Block 3 Other Income then cancel it out with another 1099-MISC Block 3 with the same amount only being negative. Im not sure if TurboTax allows this but I know taxslayer does. This will show it on your tax return in line 8 and generate a schedule 1 same as if you were reporting a 1099C but would give you a reported taxable amount of 0. That is if you are concerned about not reporting the 1099C amount itself on your return.

However I and other CPA's feel just reporting the schedule D sale will suffice as the IRS will get the 1099C and see the FMV exceeds the debt discharged amount and will then look to see if you reported it as a sale on schedule D.

The only time block 5,6,7 is filled out on a 1099C is if a foreclosure or repossession took place in conjunction with the discharged debt. This allows the creditor to only have to send a 1099C instead of having to send a 1099A and 1099C both. So the IRS knows this and is the reason on the back of the 1099C it tells you to refer to IRS Publication 4681 for further guidance when relating to secured property to determine any ordinary income to report when Block 7 is filled out.

@Carl 

@AlexanderS08

@jero20