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As many Americans have lost their homes due to the real estate crash, some are wondering whether they can avoid paying taxes on “cancellation of debts” like the one below.
Question: We own a 2001 Monaco Windsor Motor Home. Current market value is approximately $95,000. We owe approximately $155,000 on this vehicle. For tax reasons it is treated as a second home and we use the vehicle as our residence during about half each year. At 6,000 feet, the winters here can be and are pretty brutal.
Our lender has indicated that if we sell it for the current market value, they would issue a 1009 c for the difference between the loan value and selling price.
Are there any deductions we could take in reducing this difference – such as improvements we have made to the motor home over its original condition, such as adding a domed statellite TV system, adding hardwood flooring, replacement of the washer/dryer, new tires, and such?
Would we be better off just abandoning the vehicle to the lender than trying to sell it for its current apparent value? Motor home values are ranging all over the map right now – we have seen values as low as $75,000 of this vehicle to as high as $115,000.
We sincerely thank you for this assistance.
Gerry and Dee Roberts
Answer: Hi Gerry and Dee, there are two lawful ways to avoid paying tax on the “Cancellation of Debt” (1099-C) portion deemed taxable income.
One way, is that if you file for bankruptcy protection in the year you receive the 1099-C, it qualifies you, under IRC Section 108, to avoid the tax on this transaction.
The second way is to prove you are insolvent (filing bankruptcy automatically proves this) without filing for bankruptcy. The language for this is also contained in IRC Section 108. To prove you are insolvent you must prepare a Balance Sheet proving this, in the year you received the 1099-C and attaching it to your return with a special worded statement. You will need an experienced Certified Tax Problem Resolution Specialist who happens to be a CPA, tax attorney or EA to do this on your behalf. Thank you.
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