You may have received either a Form 1099A (PDF), Acquisition or Abandonment of Secured Property, or Form 1099C (PDF), Cancellation of Debt, or both. You must compute whether you have cancelled debt income. You have cancelled debt income if the debt cancelled, is debt for which you are personally liable and it exceeds the fair market value of the property at the time of the transfer. Cancelled debt income is taxable as other income on line 21 (other income) of Form 1040 (PDF). Refer to Publication 544 (PDF), Sales and Other Disposition of Assets. Complete Table 1-2, Worksheet for Foreclosure & Repossessions to determine if there is income from cancellation of debt or gain or loss from foreclosure or repossession.

You may be able to exclude cancelled debt income if all or part of the debt was discharged in bankruptcy; you are insolvent; or the debt is a qualified farm debt. Refer to Publication 908 (PDF), Bankruptcy Tax Guide, and Form 982 (PDF), Reduction of Tax Attributes Due to Discharge of Indebtedness for more information.

You are also required have to compute gain or loss on disposition of the property. You must still follow this step even if you have no discharge of indebtedness income. The difference between the sum of the amount of money received, the Fair Market Value of any other property received incident to the transfer of the property subject to foreclosure, and the amount of any nonrecourse debt from which you are relieved, and your adjusted basis in the property is your gain or loss. No portion of the gain on property which subject only to nonrecourse debt is treated as cancellation of indebtedness income. The amount realized includes any nonrecourse debt from which you are relieved in the transaction. If the property foreclosed was subject to recourse debt, the gain or loss on the disposition of the property is the difference between the FMV of the property and your adjusted basis in the property. The amount of recourse debt in excess of the FMV of the property will constitute cancellation of indebtedness income if the debt is forgiven. If the property is business property, report it on Form 4797 (PDF), Sales of Business Property, and follow the normal rules. If the property is a personal home, report it on Form 1040, Schedule D (PDF) if you have taxable gain following the normal rules for sale of a main home. Refer to Publication 523 (PDF), Selling Your Home, and Publication 544 (PDF), Sales and Other Dispositions of Assets, for more information.

References:

• Publication 523 (PDF), Selling Your Home
• Publication 537 (PDF), Installment Sales
• Publication 544 (PDF), Sales and Other Dispositions of Assets
• Publication 908 (PDF), Bankruptcy Tax Guide
• Form 982 (PDF), Reduction of Tax Attributes Due to Discharge of Indebtedness
• Form 1040 (PDF), U.S. Individual Income Tax Return
• Form 1040, Schedule D (PDF), Capital Gains and Losses
• Form 1099A (PDF), Acquisition or Abandonment of Secured Property
• Form 1099C (PDF), Cancellation of Debt
• Form 4797 (PDF), Sales of Business Property