USA 6. Which of the following is true with respect to discharge of debt? Because
ID: 2533203 • Letter: U
Question
USA
6. Which of the following is true with respect to discharge of debt? Because a taxpayer is relieved of an obligation to pay, the taxpayer always includes the debt relief as discharge of debt income. When a taxpayer sells property subject to debt, such debt is included in the amount realized When a taxpayer sells property subject to debt in an installment reporting transaction, it is always treated as a payment Discharge of debt is of no tax consequences because the taxpayer never actually receives anything. None of the above a. b. c. d. e.Explanation / Answer
(e) None of the above
If you borrow money and are legally obligated to repay a fixed or determinable amount at a future date, you have a debt. You may be personally liable for a debt or may own a property that's subject to a debt.
If your debt is forgiven or discharged for less than the full amount you owe, the debt is considered canceled in the amount that you don't have to pay. The law provides several exceptions, however, in which the amount you don't have to pay isn't canceled debt. These exceptions will be discussed later. Cancellation of a debt may occur if the creditor can't collect, or gives up on collecting, the amount you're obligated to pay. If you own property subject to a debt, cancellation of the debt also may occur because of a foreclosure, a repossession, a voluntary transfer of the property to the lender, abandonment of the property, or a mortgage modification.
In general, if you have cancellation of debt income because your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt is taxable and you must report the canceled debt on your tax return for the year the cancellation occurs. The canceled debt isn't taxable, however, if the law specifically allows you to exclude it from gross income. These specific exclusions will be discussed later.
After a debt is canceled, the creditor may send you a Form 1099-C.pdf, Cancellation of Debt, showing the amount of cancellation of debt and the date of cancellation, among other things. If you received a Form 1099-C showing incorrect information, contact the creditor to make corrections. For example, if the creditor is continuing to try to collect the debt after sending you a Form 1099-C, the creditor may not have canceled the debt and, as a result, you may not have income from a canceled debt. You should verify with the creditor your specific situation. Your responsibility to report the taxable amount of canceled debt as income on your tax return for the year when the cancellation occurs doesn't change whether or not you receive a correct Form 1099-C.
In general, you must report any taxable amount of a canceled debt as ordinary income from the cancellation of debt onForm 1040.pdf, U.S. Individual Income Tax Return, or Form 1040NR.pdf, U.S. Nonresident Alien Income Tax Return, as "other income" on line 21 if the debt is a nonbusiness debt, or an applicable schedule if the debt is a business debt. SeePublication 4681.pdf, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals).
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. Your amount realized and ordinary income depend on whether you are 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.
If your property was subject to a nonrecourse debt, your amount realized is the entire amount of the nonrecourse debt plus the amount of cash and the FMV of any property you received. You will not have ordinary income from the cancellation of the debt.
EXCEPTIONS to Cancellation of Debt Income:
Amounts that meet the requirements for any of the following exclusions aren't included in income, even though they're cancellation of debt income.
EXCLUSIONS from Gross Income:
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