You are preparing Timmy’s 2020 tax return. How much will you include as can-cellation of debt income? (a) $0 (b) $40,000 (c) $160,000 (d) $200,000 (e) $300,000 (f) Some other dollar amount (explain).
Timmy, a CPA, caught “long COVID” early in 2020 and had to retire from his accounting firm job. One result was that he no longer could pay the mortgage on the 40-acre ranch he owned in Hunt County. (Timmy had never actually lived there, he’s always lived in Dallas – he was a “gentleman-rancher” only…)
Of course once Timmy stopped making his mortgage payments, Friendly Nation-al Bank, the mortgage holder on the ranch, became very much less friendly. It foreclosed and took ownership of the ranch on November 1, 2020. Here are some additional facts:
- Timmy had purchased the ranch for $1,600,000 in 2016.
- The principal balance on the mortgage on Nov. 1, 2020, was $1,200,000.
- Timmy’s 2020 property tax bill for the ranch showed an appraised value of $900,000.
- In January 2021 the bank sent Timmy a Form 1099-C. In Box 2 (Amount of debt discharged) the bank entered $1,200,000. The bank left Box 7 (Fair market value of property) blank.
- Timmy was never actually insolvent (in the balance-sheet sense) during 2020.
- Timmy never sought bankruptcy protection during 2020.
You are preparing Timmy’s 2020 tax return. How much will you include as can-cellation of debt income?
(a) $0
(b) $40,000
(c) $160,000
(d) $200,000
(e) $300,000
(f) Some other dollar amount (explain).
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