Taxpayers in the United States
may have tax consequences when
debt is cancelled. This is
commonly known as COD
(Cancellation of Debt) Income.
According to the Internal
Revenue Code, the discharge of
indebtedness must be included in
a taxpayer's gross income. There
are exceptions to this rule,
however, so a careful
examination of one's COD income
is important to determine any
potential tax consequences.
Mortgage Forgiveness Debt Relief
Act of 2007
The Mortgage Forgiveness Debt
Relief Act of 2007 was enacted
on December 20, 2007.
Generally, the Act allows
exclusion of income realized as
a result of modification of the
terms of the mortgage, or
foreclosure on your principal
residence.
A taxpayer is insolvent when
their total liabilities exceed
the fair market value of assets.
For example, if a taxpayer has
$100,000 in liabilities, but
only $50,000 in assets, they are
considered insolvent under the
Internal Revenue Code.
Therefore, a cancellation of a
$20,000 debt will not need to be
reported as gross income.
However, if a debt of $60,000
was cancelled, the taxpayer will
have $10,000 in gross income
because their total liabilities
no longer exceed their total
assets (cancelling $60,000 in
debt means the taxpayer now has
only $40,000 in liabilities).
We Assist Taxpayers in all 50 States
and overseas!
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Accountants and Enrolled Agents
will
help you find the tax solution that
will work best for your specific
situation. Whether you have just
fallen behind on your taxes or have
been struggling with the IRS for
years, we will help you get back
into tax compliance quickly and
efficiently.
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