If you negotiate the foregiveness of indebtedness from a bank on a home loan or credit card company, you will recieved a 1009C. Many bankruptcy practictioners, treat the “discharge in a case under Title 11” and “insolvency” as equally effective ways to avoid including cancelled debt in taxable income and filed a Form 982.
Most of us think that by filing a Form 982, we can deal with any tax consequences relating to a 1099C. But – there lurks a special exception that only bankruptcy can take care of.
However, Line 10a tells you that you to reduce the basis of non depreciable property including your home by the amount of debt forgiven. As a result, if you are deemed insolvent, you can avoid paying tax on the forgiven debt – but you will have to reduce the bassis on your home resulting in a capital gain sometime in the future.
However, the saving grace is found in IRC 1017(c), which governs the adjustment of tax attributes when debt is forgiven. A “special rule” in subsection (c) provides that there is no reduction in basis on assets claimed exempt in a bankruptcy proceeding if the forgiven debt is excluded by reason of bankruptcy.
Once again – move over Dave Ramsey – bankuptcy does have some significant benefit.