debt in transfer of property

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Mortgage Debt and the Response to Fiscal Transfers

​​​​​​​​Lump-sum cash transfers are occasionally used by policymakers with the goal of temporarily increasing household consumption. These policies will be ineffective if the transfer is used to save or pay off debts instead of purchasing goods. Because of this, macroeconomic policies are usually evaluated in terms of marginal propensity to consume (MPC), which measures how much a household spends after income rises. Accurately approximating MPCs by income and wealth is crucial for assessing macroeconomic policy decisions. This blog will discuss a recently released FHFA working paper, “ Mortgage Debt and the Response to Fiscal Transfers ”.​

Since nationwide cash transfers have been used seldomly in practice, estimating MPCs is challenging. Instead, researchers use theoretical models to predict reactions of different consumers. Existing models have generally abstracted from explicitly modeling the mortgage market, focusing only on the net value of housing equity instead of the relative stocks of mortgage debt and home values. Similar levels of housing equity can entail very different levels of monthly payments and leverage. Monthly minimum payments leave households with mortgages with less disposable income for consumption spending. Higher levels of housing leverage cause more of a monthly payment to be lost to interest instead of building equity, which generates even stronger constraints on spending.

The recent FHFA working paper studies the response of consumers to fiscal transfers in a model with an explicit mortgage market. Model parameters are chosen to reproduce several aspects of cross-sectional data on leverage, liquidity, and net worth. An important addition is targeting the fraction of hand-to-mouth households who have close to zero liquid wealth. These people are the most likely to respond strongly to a cash transfer. This contribution allows for more policy-relevant analysis by ensuring that modeled spending responses are realistic and consistent with the data.

A very strong relationship emerges between mortgage debt and propensity to spend a transfer, consistent with empirical evidence. Table 1 summarizes the relationship between debt and MPC for homeowners in the model with mortgages. The first two columns (bolded in red) show that homeowners with positive debt are predicted to have an average MPC six times larger than homeowners without debt. Additionally, higher levels of debt are associated with higher spending responses, which is shown in the last four columns of Table 1.

Table 1: Average MPC by Loan-to-Value Ratio for $500 Transfer, Model with Mortgages

Sour​ce:FHFA, Author's calculation

While MPCs generally increase with debt, they are found to be poorly correlated with income. Homeowners with mortgages in the top half of the income distribution have larger MPCs compared to most households in the bottom half of the income distribution. Table 2 summarizes average MPCs within different percentiles of the income distribution in the model with mortgages as well as those from a standard model of consumer spending without mortgages.

Table 2: Average MPC by Income Percentile, $500 Transfer​

​The three ranges of income with the largest levels of MPC are bolded and colored in red for each model. The standard model from the literature predicts that households with the highest MPC are all in the bottom half of the income distribution, while the model with mortgages predicts that most of the highly responsive households are homeowners in the top half of the i​ncome distribution. This leads to very different policy implications from the two models, which is explored in Figure 1 below.

Figure 1 shows the predictions of each model for restricting transfers based on income. The solid blue line plots the spending per transfer in the model with mortgages as the transfer is progressively given to a larger fraction of households, ordered by their income. The red dashed line plots the same for the standard model without mortgages. The black dotted line at the center of the figure represents the spending per transfer if transfers are limited to a random fraction of the population instead of by income level, which is constant. The figure demonstrates how not including mortgages can lead to erroneous policy implications. For example, the standard model predicts giving a $500 transfer to only households in the bottom 40 percent of income would increase spending per transfer by about 15 percent relative to a randomly distributed transfer. Meanwhile, the model with mortgages predicts a 15 percent decrease in spending per transfer for the same policy. Homeowners with mortgages are relatively more responsive to the transfer, and this feature is overlooked in popular macroeconomic models of consumer spending. The model described in the recently released FHFA working paper shows correcting for this omission can help produce more plausible policy analyses.

Tagged: FHFA Stats Blog ; Source: FHFA ; Mortgage Debt ; Fiscal Transfers ; marginal propensity to consume (MPC)

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What Is a Conveyance?

Understanding conveyance, legality of conveyances, familial conveyances, types of real estate deeds, types of conveyances, examples of conveyances, frequently asked questions.

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Conveyance: Property Transfer Examples and FAQs

James Chen, CMT is an expert trader, investment adviser, and global market strategist.

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

The term conveyance refers to the act of transferring property from one party to another. The term is commonly used in real estate transactions when buyers and sellers transfer ownership of land, building, or home.

This is done using an instrument of conveyance—a legal document such as a contract, lease, title , or deed. The document stipulates the agreed-upon purchase price and date of actual transfer, as well as the obligations and responsibilities of both parties.

Key Takeaways

• Conveyance is the act of transferring property from one party to another.
• The term is commonly used in real estate transactions when buyers and sellers transfer ownership of land, building, or home.
• A conveyance is done using an instrument of conveyance—a legal document such as a contract, lease, title, or deed.
• Such transfers may be subject to a conveyance tax.
• Fraudulent conveyance is an unfair or illegal transfer of assets done in order to avoid creditors during bankruptcy or to avoid taxes.

In finance, the term conveyance represents the act of legally transferring property from one entity to another. So when two parties engage in the sale of a piece of property, they transfer ownership through a conveyance. For instance, when a car owner legally signs the title over to a buyer, they are engaged in a conveyance.

The term conveyance is commonly associated with real estate transactions . Conveyance of ownership of real estate is also referred to as conveyancing, and the legal representative overseeing the process can be referred to as a conveyancer . Real estate transactions often incur a tax called a conveyance tax or a real estate transfer tax. This levy is imposed on the transfer of property at the county, state, or municipal level.

A conveyance is normally executed using a conveyance instrument. This is a written instrument or contract that outlines the obligations and responsibilities of both the buyer and the seller including the purchase price , date of transfer, and any other terms and conditions associated with the sale. The instrument may be a deed or a lease —a document that transfers the legal title of a property from the seller to the buyer.

There are cases where one party doesn't live up to its obligations as outlined in the conveyance instrument or contract. When this happens, the other party can take the defaulting party to court to enforce the contract or to claim damages.

Conveyancing ensures that the buyer is informed in advance of any restrictions on the property, such as mortgages and liens , and assures the buyer of a clean title to the property. Many buyers purchase title insurance to protect against the possibility of fraud in the title transfer process.

There are also legal distinctions of conveyances, mainly stemming from British law, that hold certain rights of conveyance within family estates or bloodlines:

• Fee tail conveyances stipulate that property must remain within a family, and in particular be passed down to one's children. A fee tail only can remain in place as long as children remain alive.
• Fee simple absolute conveyances provide a claim to one's heirs, who can then assume full rights of ownership and sell to whomever they wish, even outside of the family.
• Fee simple defeasible conveyances are similar to the above but come with certain restrictions or conditions. If a condition is violated, the ownership claim reverts back to the grantor.
• Life estate conveyances exist only as long as the owner remains alive, without respect to any heirs.

If the other party doesn't fulfill their obligations, you can take them to court to enforce the contract or to claim damages.

Different forms of real estate deeds are used to make sure each party fulfills the conditions outlined in the conveyance. Some agreements may be more simple; others may hold one party contingent on several outcomes.

• Bargain and sale deeds, sometimes called special warranty in other states, occur when the grantor makes assertions about the title, but the covenants in the agreement only relate to any time period in which the grantor owned the property. Commonly used by banks on foreclosed properties, these type of conveyances hold little to no claims regarding prior ownership of the property.
• Quitclaim deeds are used to convey title without any covenants. The grantor of a quitclaim deed makes no assertion over the ownership or condition of the property. Quitclaim deeds are often used for gifting title as it is a basic type of deed that simply convey that the grantor does not hold any interest in the property being transferred.
• Reconveyance deeds are used when prevailing conditions have changed and the deed needs to be "re-conveyed". This type of conveyance is used by mortgage lenders when a borrower has paid off their mortgage; with the debt having been satisfied, the lender no longer has conditional claims to the property.

Real Estate Conveyances

Conveyance is a general term that applies in a legal sense beyond residential real estate . The conveyance in most real estate transactions is also known as the sale deed. Conveyance is the category, and sales deed is a type of conveyance within that category. There are several primary types of deeds used to transfer real estate:

The process behind a typical conveyance includes a review of liens and other encumbrances . it ensures all conditions have been met, settling all taxes and charges with the appropriate party prior to transfer, confirming financing , and preparing all the documents for final settlement. The documents provided for conveyancing typically include the deed, mortgage documents, certificate of liens, the title insurance binder , and any side agreements related to the sale.

In most states, it is illegal to transfer property to a third party in order to avoid  creditors ’ claims on that property. This is known as a  fraudulent conveyance , and creditors can pursue their claim on the property via civil legal action.

Mineral Rights Conveyances

Conveyance also applies to the oil and gas industry . As land is a form of real estate with attached rights, exploration companies use the term conveyance to refer to contracts that transfer rights to or ownership of certain parcels of land to the company.

Among the most common conveyances is a contract granting mineral rights without turning over the title of the land, but conveyances are also used to establish the right of way for a company’s operations on a landowner’s property. The landowner is, of course, compensated for transferring these rights to the exploration company.

Other Real Property

Many forms of conveyance occur when real, tangible assets are transferred not just by physical possession but by signing over the title to the new owner. For example, consider buying a new car; whether through a dealership or private seller, the car is legally conveyed when the previous car owner signs the title over to the new car owner.

Another form of conveyance is the transfer of inventory. Consider a company that buys a large number of raw materials that must be transferred to its warehouse. Based on the agreed-upon shipping terms, conveyance of ownership may happen at acquisition, sometime during delivery, or when the goods are physically possessed by the buyer. This entire act of transferring ownership of property from one entity to another embodies conveyance.

Let's look at the transfer of a piece of land owned by an individual's grandfather. In the first example, the grandfather decides to sell the property to their grandson via an arms-length transaction and at fair market value. In this case, the deed is transferred at closing to the grandson, who becomes the new legal owner.

In a second case, the grandfather decides to gift the property to the grandson. Here, no money is exchanged for the value of the property, but a gift tax must be paid on any value greater than the prevailing gift tax exclusion amount. For 2022, the IRS set the gift tax exclusion amount as $16,000, and the gift tax exemption will increase to $17,000 for 2023.

In a third case, the grandfather dies and wills the property to the grandson. Again, the deed is conveyed but no money changes hands, and there is no gift tax. Instead, there may be an estate tax on any value exceeding $12.06 million for estates of decedents who died in 2022. The basic exclusion amount is increasing to $12.92 million for decedents who pass away in 2023.

What Is a Conveyance Tax?

A conveyance tax is levied by a government authority (such as a municipality or state) on the transfer of real property. This tax is usually paid by the seller , although this may be negotiated prior to closing.

What Is a Voluntary Conveyance?

In a voluntary conveyance , the owner agrees to transfer property to a new owner, but does not receive full compensation (known as "consideration" in legal terms). For instance, when willed to an heir, voluntarily forfeited to a lienholder, or donated to charity.

What Is a Deed of Reconveyance?

A deed of reconveyance is a legal document issued by a lender or lienholder when a mortgage or other debt secured by real property is paid off. This deed releases the property owner from any further claims by the lender.

What Is a Fraudulent Conveyance?

Fraudulent conveyance occurs when a property is transferred for reasons meant to avoid taxes, creditors, or which otherwise constitutes illegal activity such as money laundering.

Conveyance is the process of transferring property from one party to another. Often relating to the transfer of investments such as real estate or securities, conveyance is heavily tied to legal processes to ensure proper documentation is maintained and applicable gift taxes (or exclusions) are followed. Conveyance not only transfers ownership of assets but delegates ongoing responsibilities and obligations of both sides of the transaction.

Legal Information Institute. " Fraudulent Transfer Act ."

Internal Revenue Service. " IRS Provides Tax Inflation Adjustments for Tax Year 2023 ."

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Debt Forbearance/Settlement Agreements: One of the Most Important and Often Overlooked Clauses

The economic impact of the global COVID-19 pandemic will likely result in a considerable number of borrower defaults, workouts and debt restructurings. An often overlooked but significant consequence of debt modifications or settlement agreements are the substantial tax issues that arise, many of which create bountiful opportunities and potential pitfalls for borrowers. However, depending upon how a debt modification or settlement is structured, and in particular whether the property which is collateral for the debt is transferred to the lender, the tax consequences need to be carefully considered, and in certain cases they can be drastically mitigated.

One of the most important tax issues of a debt forbearance or settlement agreement is whether “cancellation of debt” occurs for income tax purposes. Cancellation of debt occurs if a lender does not collect the amount a borrower is obligated to pay. Further, when property is collateral for a debt, cancellation of debt can occur through a foreclosure, repossession, mortgage modification, voluntary transfer of the property or abandonment. Cancellation of debt income is taxed at ordinary income rates while gain on the transfer of real property is generally taxed at lower capital gain rates, subject to ordinary income characterization for depreciation recapture.

When a lender cancels a borrower’s obligation to repay a debt, the borrower may be required to include the amount of that canceled debt in its gross income for the year the cancellation occurs. For debt that is used to finance property, the characterization of the debt as recourse debt and non-recourse debt, and whether the property is transferred to the lender, will significantly impact the tax consequences. The following is a list of “cancellation of debt” threshold issues that lenders and borrowers should keep in mind when negotiating debt modification, forbearance or settlement agreements.

Transfers of Property to the Lender

The threshold tax question is whether the financed property is transferred by the borrower to the lender in whole or partial satisfaction of the debt. In the case of a transfer of property to the lender in satisfaction of the debt, such as a deed-in-lieu of foreclosure, Section 1001 of the Internal Revenue Code of 1986, as amended (Code), and the Treasury Regulations issued under Code Section 1001, state that the transfer is treated as a sale of the property by the borrower to the lender. The manner of taxing this sale depends on whether the debt is recourse or non-recourse, the fair market value (FMV) of the transferred property, the extent to which the debt is discharged as a result of the transfer, and the tax basis in the property.

Debt is treated as “recourse” debt for tax purposes when the borrower is personally liable for the payment of the debt, even if the amount of the debt exceeds the FMV of the debt. The amount realized on the transfer of property subject to recourse debt is the FMV of the property . For tax purposes, the amount of the debt in excess of the FMV of the property will be the cancellation of debt income and must be included in the borrower’s gross income, subject to certain exclusions. Under these tax rules, transfers of property subject to recourse debt result in the bifurcation of the transfer into two parts. First, there is cancellation of debt income (taxed at ordinary income rates) where the amount of the recourse debt is in excess of the FMV of the transferred property. Second, there is gain or loss on the sale of the property based on the difference between the FMV of the property and the tax basis of the property. As noted above, the sale generally results in capital gain (or loss), subject to the depreciation recapture rules.

If non-recourse debt is used to finance property, the tax treatment is very different. Debt is treated as “non-recourse” for tax purposes when the borrower is not personally liable for the payment of the debt and the lender’s only option of recovery is against the financed property, not against the other assets of the borrower. The amount realized on the transfer of property subject to non-recourse debt is the amount of the debt and no portion of the potential gain is treated as cancellation of debt income. This means that the transfer of property to a lender subject to non-recourse debt does not trigger ordinary income under the cancellation of debt tax rules while identical property subject to recourse debt can, depending of the FMV of the property and the amount of the debt, trigger ordinary income under the cancellation of debt tax rules.

Non-Transfers of Property to the Lender

If the debt reduction does not involve the transfer of the property to the lender, then a debt reduction can result in cancellation of debt income to the borrower. In this case borrowers need to examine the various exceptions to income recognition under Code Section 108. The tax treatment of debt discharges under Code Section 108 depends on many factors, such as the tax classification of the borrower ( e.g., partnership, limited liability company (LLC) taxed as a partnership, single member LLC or S corporation) and whether the borrower is insolvent or subject to a bankruptcy proceeding. The Code Section 108 rules are complicated and should be carefully reviewed with the borrower’s tax advisors.

Reporting the Transaction for Tax Purposes

How each party will treat the transaction for tax purposes, and whether any party will report any cancellation of debt income to the Internal Revenue Service (IRS), should be specifically and clearly stated in each agreement which reduces or eliminates debt. Some courts have held that an agreement’s silence with respect to the tax consequences allows the lender to determine how to report the transaction to the IRS. As a result, when possible, an agreement should explicitly address how the lender will report cancellation of debt income on IRS Form 1099-C (Cancellation of Debt) or IRS Form 1099-A (Acquisition or Abandonment of Secured Property), as applicable. As noted above, the tax classification of the debt as recourse or non-recourse impacts the cancellation of debt issue and tax reporting needs to be consistent with the underlying tax classification.

If debt is being cancelled, forgiven or discharged it is important to recognize and understand this technical area of tax law. In order to prevent adverse tax results in these situations, it is imperative to analyze tax consequences of the structure of the deal and its impact on cancellation of debt income.

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What Happens if I Transfer Property Before Filing Bankruptcy?

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Transferring property includes selling it or giving it away. If you file bankruptcy, you have to report any property transfers in the two years before you filed on your bankruptcy forms. If the bankruptcy trustee finds that you fraudulent transferred any property, they can undo the transfer to get the property back and sell it to pay your creditors. Read on to learn more about property transfers and how to deal with them when filing bankruptcy.

Written by Attorney Paige Hooper .  Updated March 21, 2022

It’s no surprise that when you file bankruptcy paperwork , you must list all your assets and debts. You’re also required to provide information about your income and expenses. But did you know you must also list any property transfers for the past two years? 

Of course, you have the right to transfer your property — that is, to sell it or give it away — at any time, including before you file bankruptcy. But after you file, the bankruptcy trustee has the right to undo any transfers that qualify as fraudulent under the Bankruptcy Code. This article covers what counts as a transfer, what kinds of transfers are considered fraudulent, the consequences for fraudulent transfers, and what you can do if you’ve recently transferred property. 

What Are Transfers and Why Do They Matter?

Under the Bankruptcy Code, a transfer is when you sell or give away your legal rights to an asset . For example, selling your car is a transfer. If you let someone else borrow your car for an extended time, but your name is still on the title, that’s not a transfer. Other transactions that don’t count as transfers include:

Giving gifts for birthdays, holidays, and special occasions (within reason).

Donating items to Goodwill or a similar charity. Donating money to a charitable organization, though, usually does count as a transfer.

Tithing or giving to a religious organization, as long as it’s less than 15% of your gross annual income.

The Bankruptcy Estate

Everything you own at the time of your bankruptcy filing is considered part of your bankruptcy estate . Your trustee oversees and administers your bankruptcy estate during the bankruptcy process. In a Chapter 7 case, the trustee can liquidate the assets in your estate and use the money to pay your creditors. 

Bankruptcy exemptions allow you to claim some of your assets as exempt, meaning the trustee can’t sell them to pay your debts. In theory, the total value of your bankruptcy estate, minus the total value of all your claimed exemptions , is the amount that the trustee can pay to your unsecured creditors . Most people filing Chapter 7 bankruptcy, though, can claim everything in their bankruptcy estate as exempt. 

The Trustee’s Role

In most cases, there’s no non-exempt property for the trustee to liquidate. Still, one of the trustee’s duties is to make sure your estate contains everything that’s required by the bankruptcy laws. That includes any assets you sold or gave away in a fraudulent transfer. It’s the trustee’s job to undo such transfers and bring those assets back into your estate. In other words, you can’t keep assets that you otherwise wouldn’t be allowed to keep by simply transferring them out of your name before filing your bankruptcy petition. 

Under the Bankruptcy Code, the trustee must review any transfer that happened during the two years before you filed your bankruptcy case. This two-year period is sometimes called the “look-back” period. The look-back period is longer for some types of transfers. For example, if you transferred assets to a self-settled trust , the look-back period is 10 years. Your state’s laws may also provide for a longer look-back period for certain kinds of transfers.

What Counts as a Fraudulent Transfer?

Just because a transfer happened during the look-back period, it’s not automatically a fraudulent transfer. The Bankruptcy Code identifies two types of fraudulent transfers (sometimes called fraudulent conveyances): actual fraud and constructive fraud.

Which Transfers Count as Actual Fraud?

The key factor in determining whether a transfer is actual fraud is intent or the reason you transferred the property. A transfer is actual fraud if you transferred an asset with the intent to delay or defraud your creditors. In other words, a transfer is actual fraud if the reason you transferred the asset was to keep your creditors from getting it during your bankruptcy case. 

Which Transfers Count as Constructive Fraud?

Unlike actual fraud, constructive fraud can happen even if you didn’t intend to deceive or defraud anyone. There are two requirements for a transfer of property to be considered constructive fraud. First, you must have received less than the property was worth at the time. For example, you needed money quickly, so you sold your car for $5,000, even though it was worth $9,000. Giving assets away is another example.

The second requirement for constructive fraud is that you were insolvent at the time of the transfer, or you became insolvent because of the transfer. Insolvent means that the total of your debts is more than the total value of your assets. By law, it’s presumed that you were insolvent during the 90 days before the date you filed bankruptcy. Both requirements must be met for a transfer to be constructive fraud.

Which Transfers Aren’t Considered Fraudulent?

Some transfers aren’t considered fraudulent even though the transfer happened during the look-back period. If you sold an asset to someone for fair market value, the transfer usually isn’t fraudulent. In this scenario, the property that left your estate is about the same value as the money or property you received in exchange. In other words, the transfer didn’t affect the overall value of your estate.

If the asset you transferred was exempt, the transfer usually isn’t fraudulent. If you hadn’t transferred the asset and still had it when you filed bankruptcy, would you be able to claim it as exempt? If so, it usually won’t be considered a fraudulent transfer because even if the trustee got the property back, the exemption would prevent them from liquidating or selling it. 

Likewise, if you gave away an asset that didn’t have any real market value, the transfer likely isn’t fraudulent. Property with little or no resale value wouldn’t have any meaningful impact on the value of your bankruptcy estate. Put another way, if the trustee got the property back, selling it wouldn’t bring in much money for your estate.

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What if I Need To Transfer (or Already Transferred) Something?

If you must sell or give away property before filing bankruptcy, or if you plan to file bankruptcy and have already transferred property within the past two years, being prepared can help things go more smoothly with your trustee. Keep records about the transfer and bring copies to your meeting of creditors so the trustee can review them. Be ready to explain how you spent any money you received from the sale.

Be sure to fill out all the requested information in your bankruptcy forms, especially your Statement of Financial Affairs . Disclose and explain as much as possible and have documentation on hand if necessary. Being honest about your transfers will usually help the trustee’s investigation go much more quickly and help keep your case on schedule. 

Certain transfers will always raise red flags with the trustee, such as:

A transfer to a family member, business partner, or another insider.

A transfer that happens right after a creditor sues you or threatens to sue you. You’ll likely need to show that you didn’t just transfer the asset to protect it from the lawsuit.

A transfer that appears to be in name only. For example, if you transferred your car title into your sister’s name, but you still have the car and drive it regularly, you’ll probably need to explain why you transferred the title.

A transfer that’s not listed in your bankruptcy paperwork. If you forgot to list something, you can amend your paperwork to include it.

Avoid these red flags if possible or be prepared to explain to them if they’ve already happened. If you don’t have a good explanation — that is, if you intentionally transferred assets to keep your creditors from getting them — consider contacting a local bankruptcy attorney to get legal advice. Waiting to file bankruptcy until after the look-back period has passed can sometimes be a form of bankruptcy fraud itself, so it’s wise to understand your options before proceeding. Many bankruptcy lawyers offer free consultations .

What Happens if the Trustee Determines a Transfer Was Fraudulent?

If your trustee reviews a transfer and determines it falls within either of the Bankruptcy Code’s definitions of fraud, they’ll probably file a motion to void — or undo — the transfer. The trustee gets the transferred asset back from whoever you sold or gave it to. The asset becomes a part of your bankruptcy estate, and the trustee can sell it and use the proceeds to pay your creditors.

Depending on the circumstances, the trustee can take further action, especially if they find that the transfer involved actual fraud. The trustee can ask the bankruptcy court to deny your bankruptcy discharge or dismiss your case . In cases of significant actual fraud, you could face criminal charges for bankruptcy fraud and/or perjury .

Let’s Summarize…

If you transfer assets before filing bankruptcy, the trustee may be able to get the assets back and liquidate them to pay your creditors. The trustee can undo any transfer that qualifies as fraud under the Bankruptcy Code. There are two types of fraudulent transfers under the code. Constructive fraud is transferring property for less than its fair value while you were insolvent. Actual fraud is transferring assets to keep them away from your creditors. Actual fraud can result in additional consequences. 

Be sure to disclose all recent transfers in your bankruptcy forms. You should also be prepared to explain any transfers to the trustee and provide documentation if necessary. Being forthcoming about any transfers will help the trustee’s investigation go smoothly and can help prevent a finding of actual fraud.

Attorney Paige Hooper

Paige Hooper is a seasoned consumer bankruptcy attorney with 15 years of experience successfully representing debtors in Chapter 7, Chapter 11 and Chapter 13 cases. Paige began practicing bankruptcy law in 2006 and started her own solo, multi-state bankruptcy practice in 2012. Gi... read more about Attorney Paige Hooper

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Tax consequences of real property foreclosures

• Individual Income Taxation
• Specialized Issues
• Tax Planning; Tax Minimization

Owners of real property sometimes encounter difficult financial times due to an overall decline in the economy or events that adversely affect their particular area of the country. These conditions may produce situations where an owner does not have sufficient cash flow from a property to meet the debt requirements, or the property declines to a value that is less than the outstanding debt. In either case, foreclosure of the property by the lender is often the final outcome.

Real property foreclosures can produce various tax consequences depending on the type of debt (recourse or nonrecourse), the taxpayer's adjusted basis in the property, and the taxpayer's financial condition at the time of the foreclosure. Proper planning both before and after a foreclosure can help minimize the tax consequences of these transactions.

Note : There are special tax provisions (not covered in this column) for cancellation - of - debt (COD) income on principal residences.

Recourse and nonrecourse debt often produce different tax results

A recourse debt enables the lender to pursue the individual borrower for the balance due on a debt in addition to foreclosing on the property. Conversely, a nonrecourse debt is secured solely by the real property, thus shielding the individual borrower from personal liability. When property is foreclosed, the tax results differ depending on whether the debt is recourse or nonrecourse. Understanding the differences is a key factor in proper planning for the foreclosure.

Recourse debt

A foreclosure, or a deed in lieu of foreclosure, transaction may result in COD income to the borrower when recourse debt is involved. The taking of property by the lender in satisfaction of a recourse debt is treated as a deemed sale with proceeds equal to the lesser of the property's fair market value (FMV) at the time of foreclosure or the amount of secured debt. If the amount of debt exceeds FMV, the difference is treated as COD income if it is forgiven (Regs. Sec. 1. 1001 - 2 (c), Example 8, and Rev. Rul. 90 - 16 ). (Note that Sec. 108 provides special mandatory relief provisions for COD income of certain bankrupt or insolvent taxpayers.)

As a result of these rules, it is possible for a foreclosure transaction involving recourse debt to result in both (1) a gain or loss from the sale of the property because the property's FMV is more or less than basis and (2) COD income because the secured debt exceeds the property's FMV. The amount credited or received in a foreclosure sale determines the sales proceeds for computing gain or loss ( Aizawa ,29 F.3d 630 (9th Cir. 1994) ; Webb ,T.C. Memo. 1995 - 486 ). The character of the gain or loss depends on the character of the property subject to the foreclosure.

Observation : To the extent the underlying debt discharged is allocated to a passive activity, the COD income is treated as arising from a passive activity. Conversely, to the extent the underlying debt is attributable to a nonpassive activity, the COD income is nonpassive (Rev. Rul. 92 - 92 ).

Note : The bid price in a foreclosure sale is presumed to be the property's FMV unless there is clear and convincing proof to the contrary (Regs. Sec. 1. 166 - 6 (b)(2); Community Bank , 819 F.2d 940 (9th Cir. 1987)). The Tax Court has acknowledged that the amount bid by a lender may be arbitrary, so if the taxpayer presents clear and convincing proof (e.g., an appraisal) of a more accurate FMV, the FMV amount rather than the bid price is used in determining the sales proceeds from the transaction and any related COD income ( Frazier , 111 T.C. 243 (1998)).

COD income will occur in a foreclosure transaction only if the lender discharges part or all of any deficiency (excess of indebtedness over the property's FMV) upon taking the property. If the lender continues to pursue the borrower for the deficiency, COD income will not occur until that deficiency is discharged for less than full value. If the lender fails to pursue the borrower or to discharge all the indebtedness, the COD income will occur when the state law for enforcing the debt expires.

Example 1. Property foreclosure involving recourse debt: M bought a commercial building on Jan. 1, 20X1, for $5,000,000. He put $500,000 down and financed the balance with a $4,500,000 recourse debt. The purchase price was allocated $500,000 to land and $4,500,000 to the building.

In 20X3, M started to experience financial difficulties from the property due to falling rents and the loss of a major tenant. Finally, when he was unable to make further payments on the debt, he deeded the property to the bank in lieu of foreclosure on Nov. 30, 20X4.

When the property was deeded back to the bank, the outstanding balance on the debt was $4,325,000. M' s adjusted basis after depreciation in the property was $4,052,500 — $3,552,500 in building and $500,000 in land. The FMV of the property at the time of foreclosure was $4,150,000.

In a deed in lieu of foreclosure transaction, the transfer of the property to the recourse debt lender is treated as a sale with proceeds equal to the lesser of the FMV of the property ($4,150,000) or the amount of the outstanding debt ($4,325,000). Thus, M recognizes a Sec. 1231 gain of $97,500 ($4,150,000 FMV less adjusted basis of $4,052,500). The gain is allocated between the land and building based on the relative FMV of each.

The excess of the debt principal extinguished in the transaction ($4,325,000) over the FMV of the property ($4,150,000) results in COD income of $175,000. If the lender forgives the deficiency at the time of the transaction, M recognizes the income then. If, however, the lender pursues M for this deficiency, this part of the transaction remains open, and M does not recognize income until the lender eventually forgives it or the debt is settled for an amount less than full value.

As Example 1 illustrates, the FMV assigned to the property at foreclosure or deed in lieu of foreclosure determines the amount of the borrower's gain or loss from the deemed sale of the property and potential COD income. If the property is used in a trade or business or rental activity, a gain from the sale is often treated as a capital gain under Sec. 1231. Conversely, COD income is ordinary income to the borrower.

If the borrower is insolvent at the time of the foreclosure, it may be advantageous to get the lowest FMV possible assigned to the property. This will minimize the amount of gain from the deemed sale and maximize the amount of COD income, which can be fully or partially excluded from income under Sec. 108. In addition, a taxpayer who deeds real property to a lender and has debt discharged may be eligible to make the election for real property business debt.

Alternatively, if the borrower is solvent at the time of the foreclosure, it is usually advantageous to value the property as high as possible. This will maximize gain that may be eligible for preferential capital gain treatment and minimize the amount of ordinary income from debt discharge.

It is common for the FMV of a property to fall within a reasonable range of amounts. Thus, with proper planning prior to the foreclosure or deed in lieu of foreclosure, borrowers can often negotiate with the lender to get the most advantageous FMV assigned to the property. This is most likely to occur when the lender intends to forgive the debt deficiency rather than continue to pursue the borrower. Furthermore, a borrower may have more negotiating ability if the property is voluntarily deeded back rather than foreclosed upon.

Note : Certain lenders, generally banks, savings and loans, and other financial institutions, that foreclose on property or take property in lieu of foreclosure must issue the borrower a Form 1099 - A , Acquisition or Abandonment of Secured Property , reporting the details of the foreclosure. Among other information, Form 1099 - A shows the FMV of the property at the time of the transfer and whether the borrower is personally liable for repayment of the remaining loan balance. Without planning and pretransfer negotiation with the lender, the borrower may be surprised by and unable to rebut the information reported on Form 1099 - A .

Nonrecourse debt

The Supreme Court's decision in Tufts , 461 U.S. 300 (1983), resolved the main issue of the tax treatment of a foreclosure, or deed in lieu of foreclosure, transaction involving nonrecourse debt. Such a transaction is treated as a deemed sale by the borrower to the lender with proceeds equal to the amount of nonrecourse debt. Also, an abandonment of real property encumbered by nonrecourse financing is treated like a foreclosure in that there is a deemed sale of the property ( Middleton , 693 F.2d 124 (11th Cir. 1982)).

An Eighth Circuit decision, Allan , 856 F.2d 1169 (8th Cir. 1988), concluded the amount realized on the deemed sale includes the full amount of the nonrecourse debt plus any additions to principal for items, such as accrued interest, that previously generated ordinary deductions for the borrower. For a cash - basis borrower, however, the amount realized on the deemed sale would equal only the principal balance of the nonrecourse debt.

Note : The theory that the amount realized from a deemed sale equals the full amount of nonrecourse debt principal means there can be no COD income due to a foreclosure or deed in lieu of transaction involving only nonrecourse debt. Unlike the treatment of foreclosures involving recourse debt, the FMV of the property is irrelevant. Also, the insolvent or bankrupt status of the taxpayer does not affect the results.

Example 2. Property foreclosure involving nonrecourse debt: Assume the same facts as in Example 1 except M' s debt is nonrecourse rather than recourse. Here, transferring the property to the lender results in a deemed sale of the property with sales proceeds equal to the balance of the nonrecourse debt. Thus, M recognizes a Sec. 1231 gain of $272,500 ($4,325,000 outstanding debt less adjusted basis of $4,052,500). There is no COD income.

Sale of clean-energy credits: Traps for the unwary

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This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.

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• From the Tax Adviser

Income Tax Consequences of Certain Gift Transactions

   January 2002 > From The Tax Adviser

From The Tax Adviser:

NONCASH GIFTS

A gift is the voluntary transfer of cash or property without consideration. Because the donor receives no consideration, a gift usually does not create income or gain to him or her. Transactions in which a donor receives partial consideration, however, are treated as part gift and part sale, which may result in income or gain.

The most common of these transactions are gifts of encumbered property, net gifts and gifts of stock options.

Noncharitable donees. A gift of encumbered property is valued as the excess of the property’s fair market value (FMV) at the time of the gift over any debt to which the property is subject. The liability encumbering the property is deemed consideration paid to the transferor; thus, the donor realizes income to the extent the liability exceeds his or her adjusted basis.

Charitable donees. When a donor transfers encumbered property to a charity and the property’s FMV exceeds his or her basis, the donor will recognize income. The basis of the property transferred must be allocated between that portion considered a sale and that considered a gift, which may trigger income or capital gain to the donor.

Generally, a donor will not recognize any income on the transfer of a net gift. However, if the value of the gifted property has appreciated over its basis and the gift tax exceeds the donor’s basis in the property, he or she may have to recognize income.

If ISO stock is sold before the holding period expires, the employee must recognize income for the difference between the option’s exercise price and the stock’s FMV.

If an employee gives ISO stock before the holding period has expired, he or she must recognize compensation income for the excess of the stock’s FMV over its exercise price. If the employee waits until the holding period has passed to transfer the stock, he or she is not required to recognize income on the gift.

For discussion of these issues, see “Gift May Create Income or Gain to Donor,” by Boyd Randall, Robert Gardner and Dave Stewart, in the January 2002 issue of The Tax Adviser.

—Nicholas Fiore, editor The Tax Adviser

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The irs, fraudulent transfers, and transferee liability.

Can you be held liable for a tax liability owed by another taxpayer?

Yes, under certain circumstances.  The IRS  uses fraudulent transfer law  and “transferee” liability tools to collect unpaid taxes where a taxpayer has transferred property to a third party.  The third party, known as a “transferee” or “nominee,” may be liable to the IRS based on several legal theories, such as transferee liability, nominee liability, alter ego liability and other mechanisms.  This article provides a comprehensive overview of IRS third-party liability.

Third-Party Liability

Under federal tax law, a third party can be held liable for the tax liability of another person.  The IRS often uses the following legal theories to hold a third party liable for taxes that are owed by another person:

• Transferee Liability

Fiduciary Liability

• Successor-in-Interest Liability
• Nominee Liability
• Alter Ego Liability

When invoking these legal theories, the IRS often alleges fraud.  Thus, taxpayers and third parties in this context typically face a higher risk of civil fraud penalties or criminal prosecution.

Levies and Seizures

The IRS may employ an administrative levy or seizure action against third parties where one or more of the following events have occurred:

• Notice of Federal Tax Lien (NFTL) filing before the transfer to the third party.
• Special Condition Transferee NFTL filing, where the statutory lien arose before the transfer.
• Special Condition NFTL filing  other than the Transferee NFTL, where the third party is in possession of a taxpayer’s assets.
• A section 6901 assessment against the transferee.

Judicial Remedies

The Department of Justice may seek judicial action against a taxpayer or third party in this context as well.  For example, DOJ may assert the following common legal actions:

• Suit to foreclose the taxpayer’s federal tax lien secured by a regular or Special Condition NFTL filing.
• Suit to establish a transferee liability where IRC 6901 is unavailable and the property value decreased after the transfer.
• Suit to set aside a fraudulent conveyance where IRC 6901 is unavailable and the property value increased after transfer. This route is generally undertaken in conjunction with a lien foreclosure.

Transferee Theories

Transferee liability may arise under (i) a contract, (ii) federal statutes, or (iii) state law. Often, the IRS begins efforts to collect against a third party where it believes a fraudulent transfer occurred. It may employ a transferee theory under various circumstances:

• Lien Tracing. A statutory federal tax lien attaches to property and the property has been transferred by the taxpayer through a gift, bequest, devise, or inheritance before an NFTL was filed. There is no requirement that the taxpayer retain use of or a beneficial interest in the property.

           This theory is unavailable for a transferee qualifying as a bona fide purchaser. See IRC section 6323.

• IRC 6901. Legal title to property has been transferred and no statutory federal tax lien attached prior to the transfer. Under IRC 6901(h), a transferee includes a donee, heir, legatee, devisee, and distributee, and with respect to estate taxes, includes any person who, under IRC  section 6324(a)(2), is personally liable for any part of such tax and the liability is income, estate, or gift tax. (Note: It could also include other taxes, such as employment taxes through a liquidating partnership or corporation, or a corporate reorganization.) The assessment must have been made within the limited timeframes described in IRC 6901(c) including any applicable extensions.
• Fiduciary Liability Theory.  A representative of a person or an estate (except a trustee acting under the Bankruptcy Code of Title 11) paying any part of a debt of the person or estate before paying a debt due to the United States can be personally liable to the extent of the payment.
• Successor Liability Theory . Under the successor-liability theory, the IRS seeks to impose liability because the taxpayer sold or transferred assets to (or merged with) another corporation and the recipient or surviving corporation is liable under state law for the debts of the predecessor. Successor liability is dependent on state law.

The successor corporation may be liable:

• As a transferee, or
• As the successor corporation may be primarily liable.
• Nominee Theory

A nominee theory allows collection from property held in the name of the taxpayer’s nominee. That is, the third party  holds the property nominally  or  holds it in name only . The nominee theory focuses on the relationship between the taxpayer and the property.

• Alter Ego Theory.  An alter ego theory allows the IRS to collect from a taxpayer’s alter ego. Under an alter-ego theory, the IRS asserts that the taxpayer and the alter ego are so intermixed that their affairs are not readily separable. Thus, the alter ego theory focuses on the relationship between the taxpayer and the alter ego.

Collection from the Transferee is Secondary

Courts generally consider a transferee’s liability to be secondary to that of the transferor who is said to have primary liability. Secondary liability essentially means:

• The transferee derives liability from the transferor’s liability, and
• Property is received under circumstances subjecting the transferee to the liabilities of the transferor.

Generally, in order to pursue a transferee, the IRS must show that collection remedies against the transferor have been exhausted or would be futile.

Establishing Transferee Liability

A transferee may be liable for a tax either “at law” or “in equity.”

• At Law . The transferee’s liability is directly imposed by federal or state law or agreed to as part of a contract.
• In Equity . The transferee’s liability is imposed based on equity or principles of fairness.

Transferee liability in equity is generally based on fraudulent conveyance laws.  Fraudulent conveyance laws were initially developed by courts based on the principle that debtors may not transfer assets for less than adequate consideration if they are left unable to pay their liabilities.

The Internal Revenue Code contains several provisions that impose direct liability on a transferee for the transferor’s tax.

• Estate Tax Liability.   A distributee/recipient of certain types of property from a decedent’s estate is personally liable under IRC 6324(a)(2) for estate taxes to the extent of the value of the property received.
• Gift Tax Liability.   A donee of a gift is  personally liable  under IRC 6324(b) for any gift tax incurred by the donor to the extent of the value of the gift.

Most states also have statutes that directly impose liability on a transferee in certain circumstances.

• The Uniform Commercial Code’s (UCC) bulk sale provisions or other state laws impose liability for a business’ debts on the purchaser of substantially all of the inventory or equipment of the business if notice of the purchase is not given to the business’s creditors.
• Corporate merger or consolidation. The corporate laws of many states impose liability on the surviving corporation for the debts of the constituent corporations that no longer exist following a merger or consolidation.
• Most states impose liability when one corporation sells its assets to another corporation and the asset sale is tantamount to a “de facto merger” or a “mere continuation” of the transferor corporation.
• Distributions upon dissolution of corporation. Most states have statutes that authorize creditors to sue shareholders for distributions upon dissolution of the corporate taxpayer. Some states have statutes imposing liability on a director for distributions made upon dissolution of a corporation even if the director is not a shareholder.

Transferee liability may also be directly imposed on a transferee if the transferee expressly or impliedly agreed to assume the transferor’s tax liability in a contract.

Transferee Liability Based on Fraudulent Transfers (“In Equity”)

A transfer is fraudulent when a taxpayer owes a debt to a creditor and real or personal property is transferred to a third party with the object or the result of placing the property beyond the reach of the creditor or hindering the creditor’s ability to collect a valid debt.

When  fraudulent transfers  are identified, the IRS may file a (special condition) NFTL identifying the third party receiving property and identifying specific property involved on a Nominee and/or Transferee NFTL to prevent clouding of title. Alter Ego and Successor in Interest NFTLs do not require that the specific property be identified. Depending on the facts of the case and the applicable state law, transferee liability based on fraudulent transfer may overlap with liability imposed under the trust fund doctrine, successor liability, and the liability of shareholder and corporate distributees.

Fraudulent Transfers Under Federal and State Law

Prior to the FDCPA, the United States relied on the creditor and debtor laws of the states to attack fraudulent transfers.

The FDCPA gives the United States a uniform federal procedure for setting aside a fraudulent transfer to aid in the collection of federal debts, including tax debts.

The United States is not, however, bound to use the FDCPA to collect its debts. It can proceed under any cause of action provided by state or federal law.

All states recognize a cause of action to set aside a fraudulent transfer. A majority of jurisdictions have adopted either the Uniform Fraudulent Conveyance Act (UFCA), 7A Pt. II ULA 246 (2 states & U.S. Virgin Islands) or its successor, the Uniform Fraudulent Transfer Act (UFTA), 7A Pt. II ULA 2 (43 states and the District of Columbia).

The FDCPA, the UFCA and the UFTA recognize both actual fraud and constructive fraud as grounds for setting aside a transfer.

Types of Fraud in a Fraudulent Transfer

Constructive fraud  and  actual fraud  are the two principal types of fraud. The IRS must prove at least one type of fraud to set aside a transfer under a fraudulent-transfer theory:

Constructive Fraud.  Constructive fraud occurs when property is transferred for inadequate consideration (or for less than the reasonably equivalent value) and the transferor either is insolvent when the transfer occurs or is made insolvent by the transfer. Notably, the transferor’s actual intent is immaterial if constructive fraud is proven.

Actual Fraud.  Actual fraud occurs when property is transferred with the actual intent to hinder, delay, or defraud a creditor in the collection of a debt owed it.

Actual fraud is generally proven through circumstantial evidence known as the “ indicators of fraud ,” such as lack of adequate consideration or a transfer to insiders.

Proof of constructive fraud is sufficient to set aside a transfer that occurs  after  the debt arises.

Proof of actual fraud will defeat a transfer whether the debt arises  before or after  the transfer.

Constructive Fraud

Constructive fraud exists when a transferor does not receive reasonably equivalent value (FDCPA & UFTA) or fair consideration (UFCA) in exchange for the transfer, and the transferor was insolvent at the time of the transfer or became insolvent as a result of the transfer.

Reasonably equivalent value.  The FDCPA 3303(b) defines the phrase reasonably equivalent value as “the person acquires an interest of the debtor in an asset pursuant to a regularly conducted, non-collusive foreclosure sale or execution of a power of sale for the acquisition or disposition of such interest upon default under a mortgage, deed of trust, or security agreement.”

The concept of reasonably equivalent value does not exist under the UFCA; instead, the concept of fair consideration is used.  Fair consideration for purposes of the UFCA is given in exchange for property if:

• it is a “fair equivalent” to the property conveyed; and
• exchanged in good faith.

A transferor is insolvent if the sum of the transferor’s debts exceeds a fair valuation (FDCPA & UFTA) or the fair salable value (UFCA) of the transferor’s assets. FDCPA 3302; UFTA 2; UFCA 2.

The FDCPA and the UFTA presume that a transferor who generally is not paying debts as they come due is insolvent.

Where insolvency results from a series of related transfers, some of which may have occurred before actual insolvency, all of the transfers can be set aside as fraudulent.

The FDCPA and the UFTA contain another category of transfers that are considered fraudulent as to a current creditor. A transfer is fraudulent if:

• the transfer was made to an insider on account of an antecedent (prior) debt;
• the transferor was insolvent at the time; and
• the insider had reason to believe that the transferor was insolvent when the transfer occurred.

Such a transfer is commonly known as a preferential transfer to an insider. FDCPA 3304(a)(2); UFTA 5(b). Examples of insiders include:

• family members, when the transferor is an individual
• directors and officers, when the transferor is a corporation
• general partners and relatives of general partners, when the transferor is a partnership. FDCPA 3301(5); UFTA 1(7).

Actual Fraud

Proof of actual fraud as to a debt owed to the United States is sufficient under the FDCPA, the UFCA, and the UFTA to set aside a transfer whether the debt arises before or after the transfer.

Actual fraud exists when a transferor actually intended to hinder, delay or defraud a creditor. Because it can be difficult to prove that a transfer was made with the actual intent to defraud creditors, use of circumstantial evidence—” indicators of fraud “—is often necessary.

A transferor’s actual intent is generally proven through indicators, or “badges,” of fraud. The commonly recognized  indicators of fraud  include:

• the transfer lacks fair consideration;
• the transferor and transferee are closely related, such as family members, or a shareholder and the shareholder’s closely held corporation;
• the transferor retains the enjoyment, possession and control of the property after its transfer;
• the transfer was concealed;
• before the transfer, the transferor had been sued or was threatened with suit;
• substantially all of the transferor’s assets were transferred;
• the transferor left the jurisdiction secretly;
• the transferor removed or concealed assets;
• the transferor was insolvent at the time of transfer or became insolvent shortly after the transfer occurred;
• the transfer occurred shortly before or after a substantial debt was incurred; or
• the transferor transferred the essential assets of a business to the holder of a lien who subsequently transferred the assets to an insider. See FDCPA 3304(b)(2); UFTA 4(b).

Courts have recognized that a transfer made shortly before or after the tax is due may be evidence of fraud.

In attempting to set aside a transfer, the IRS will offer attempt to demonstrate that the transaction did not occur in the usual course of business. The IRS may point to a number of indicators, such as:

• a sale made outside of usual business hours;
• a failure to record an instrument that would normally be recorded;
• an extension of credit for an unusually long period of time to a purchaser without security; and
• a failure by the transferee to properly inventory goods transferred to him.

The IRS also maintains that fraud may be evidenced by the reservation of an interest in the transferred property that is inconsistent with a bona fide transfer.

The FDCPA, the UFTA, and the UFCA also deem a transfer of property without receipt of reasonably equivalent value (FDCPA and UFTA) or fair consideration (UFCA) to be fraudulent, whether the debt arises before or after the transfer, if the transferor:

• was engaged in or was about to engage in a business or a transaction for which the remaining assets of the transferor were unreasonably small in relation to the business or transaction, or
• intends or believes that he will incur debts beyond his ability to pay as they mature. FDCPA 3304(b)(1)(B); UFCA 5 & 6; UFTA 4(a)(2).

Subsequent Transfers

A good-faith purchaser from a transferee of the transferred property generally takes the property free of the initial transferor’s fraud. The same holds true for a creditor who in good faith extends a loan to the transferee and takes a security interest in the transferred property.

A subsequent transferee with notice of the fraudulent transfer however, takes the property subject to the rights of the initial transferor’s.

Trust Fund Doctrine

Courts have created the so-called trust fund doctrine.  Under this doctrine, when a transfer leaves the transferor without sufficient assets to pay debts, the transferee is deemed to hold the transferred property “in trust” for the benefit of the transferor’s creditors.

The trust fund doctrine generally requires that the IRS demonstrates that –

• the alleged transferee received property of the transferor;
• the transfer was made without consideration or for less than adequate consideration;
• the transfer was made during or after the period when the tax liability of the transferor accrued;
• the transferor was insolvent prior to or because of the transfer of property or that the transfer of property was one of a series of distributions of property that resulted in the insolvency of the transferor;
• all reasonable efforts to collect from the transferor were made and any further collection efforts would be futile; and
• the value of the transferred property.

The trust fund doctrine is most commonly used to impose transferee liability on a shareholder for taxes incurred by a corporation when the shareholder receives assets from a corporation prior to its dissolution. Recovery under the doctrine is limited to the value of the property transferred.

Successor Liability of a Corporation

Successor liability for a transferee may arise under two different scenarios:

• a corporation surviving or resulting from a merger, consolidation or reorganization of one or more corporations; or
• a corporation to which all or substantially all of the assets of another corporation has been sold or otherwise transferred.

Successor liability may be a primary liability if a state statute provides that a corporation surviving or resulting from a merger or consolidation assumes by operation of law all of the liabilities of the constituent corporations.

State successor-liability law generally imposes liability under the following circumstances:

• when the successor expressly or impliedly assumes the liabilities;
• when a corporation reorganizes, merges, or consolidates with another corporation;
• when one corporation transfers its assets to another corporation but the corporations do not formally merge, (i.e., there may nevertheless be a de facto merger or the successor may be considered a mere continuation of the corporation selling or transferring assets_; or
• the transaction amounts to a fraudulent conveyance.

Where these circumstances exists, the IRS may rely on the successor liability doctrine to hold a successor corporation liable for the tax debts of its predecessor.

Whether a de facto merger or mere continuation exists generally depends on whether:

• the second corporation continues the business or performs the same functions of the taxpayer;
• the taxpayer’s employees become the employees of the second corporation;
• the taxpayer and the second corporation are owned or controlled by the same individual or individuals;
• the successor’s business activities are carried out in the same location;
• less than full consideration is paid for the transferred assets; and
• the business relationships remain relatively static.

If the surviving corporation may be held liable for the transferor’s debts as a successor under state law, the IRS may collect the transferor’s tax liability from the successor using the Section 6901 procedures.

Transferee Liability of a Shareholder or Distributee of a Corporation

Shareholders/distributees who receive assets from a corporate liquidation can be subject to transferee liability for the unpaid corporate income taxes, penalties, and interest.

Shareholders who receive a corporation’s assets on its dissolution and who are liable as transferees are jointly and severally liable to the extent of the assets transferred to them. As such, the IRS is not obligated to pursue all of the shareholders for collection of the corporation’s unpaid income taxes. The liability of a shareholder, however, is generally limited to the value of the assets received from the corporation.

Shareholders/distributees may also be liable as transferees when assets are distributed but the corporation is not liquidated or dissolved. Examples include the following scenarios:

• A distribution to a shareholder based on the shareholder’s equity interest in a corporation, such as a dividend, or a payment by the corporation of a debt owed to a shareholder, can be a preferential transfer to an insider, thus, resulting in transferee liability.
• If a stockholder is also an officer or an employee of the corporation, and receives a bonus or salary which is unreasonable, the stockholder may be treated as a transferee on the theory that the excessive salary is the equivalent of a distribution of corporate assets.

A corporation or person who acquired the stock or any asset of a corporation may be liable as a transferee.

• If the acquisition of assets is a fraud to the creditors of the transferor corporation, the acquiring corporation is liable as a transferee based on a fraudulent transfer. A sale or distribution of corporate assets may also result in a trust in favor of creditors under the trust fund doctrine.
• Transferee liability may arise in a stock or asset sale context, where the sale is in economic substance a “sham.” This liability is most likely to be based on a fraudulent transfer.
• The purchase of the stock of a corporation, followed by the liquidation of the corporation, may render the purchaser liable as a transferee as a successor.

The IRS may also assert transferee liability in  Notice 2001-16, 2001-09 I.R.B. 730 , Intermediary Transactions Tax Shelter and  Notice 2008-111, 2008-51 I.R.B. 1299 , Intermediary Transaction Tax Shelters. These  listed transactions  are basically intended to avoid the payment of taxes on a corporate stock or asset sale. The participants to the transaction — the seller’s shareholders, the buyer, the intermediary, and the transaction’s facilitators — may all be possible transferees.

Extent of Transferee Liability

The amount of the transferee’s liability for the transferor’s unpaid tax, penalties, and interest depends on whether transferee liability is based “in equity” or “at law.”

When transferee liability is based “in equity,” the transferee’s liability is generally limited to the value of the property transferred. For example, liability of shareholders under the trust fund or similar doctrine is generally limited to the value of property received. Transferee liability in equity is equal to the value of transferred property at the time of transfer. However, if the value has decreased since the transfer, the liability may be equal to the value of the property at the time a court finds the transfer to be fraudulent.

Generally, transferee liability “at law” results in full liability, regardless of the value of the assets received, unless limited by state or federal law or by agreement.

When transferee liability is “at law” because the transferee has agreed to assume the transferor’s liability, the transferee is liable for the full amount of the transferor’s liability, regardless of the value of the assets transferred.

Where transferee liability is based on state law, state law determines the extent of liability.

Liability is not limited to the value of the assets transferred if there is a reorganization, merger, consolidation, or the successor corporation is the result of a de facto merger or a mere continuation of the taxpayer.

Shareholder liability is limited to the value of the distribution to the shareholder where a state statute imposes liability upon distribution of assets upon dissolution of a corporation if creditors have not been paid.

Similarly, a transferee’s liability for gift taxes and estate taxes, based on the Internal Revenue Code, is limited to the value of the gift or the property distributed from the decedent estate.

Each transferee is jointly and severally liable for the transferor’s unpaid taxes to the extent of the value of assets received at the time of transfer. The IRS therefore is not required to apportion liability among transferees.

Generally, a transferee is liable for the transferor’s total tax liability, including interest that accrues on that tax liability before the transfer, but only to the extent of the value of the assets transferred. If the value of the transferred assets is less than the transferor’s liability, interest is determined under state law.

Pursuant to 31 USC section 3713(b), a representative of a person or an estate (except a trustee acting under the Bankruptcy Code, Title 11) paying any part of a debt of the person or estate before paying a debt due to the United States is personally liable to the extent of the payment for unpaid claims of the United States.

A fiduciary is not liable, however, unless the fiduciary knows of the debt or had information that would put the fiduciary on notice that an obligation was owed to the United States.

Personal liability under 31 USC section 3713(b) only applies where the United States has priority under 31 USC 3713(a), the applicable insolvency statute.

The priority generally applies where the person or estate is insolvent.

The priority is superseded by interests that would have priority over the federal tax lien under IRC section 6323.

Personal liability is limited to the value of the assets that the fiduciary distributes in violation of federal priority.

IRC section 6901(a)(1)(B) permits the IRS to impose personal liability on a fiduciary under 31 USC section 3713(b) by way of a procedure that begins with the issuance of a notice of fiduciary liability. The fiduciary may then contest the proposed liability in the Tax Court.

Methods of Collecting from a Transferee or Fiduciary

• District Court Suit. The IRS can use judicial enforcement remedies to pursue collection of the tax liability. The IRS can bring an action in district court against a transferee or fiduciary to impose transferee or fiduciary liability or a suit to set aside a fraudulent conveyance.
• IRC 6901 Procedures. The IRS can invoke the procedures under IRC Section 6901, which provides a mechanism for collecting the unpaid taxes, penalties and interest from a transferee or fiduciary when a separate substantive legal basis provides for the transferee’s or fiduciary’s liability. An assessment under IRC 6901 allows for collection against any assets held by the transferee or fiduciary.

IRC Section 6901 is a procedural statute that does not by itself create liability.  Applicable state or federal law determine the existence or extent of a transferee’s or fiduciary’s liability.

Other Administrative Remedies

NFTL is filed prior to transfer:  If the IRS properly filed a Notice of Federal Tax Lien “NFTL” prior to the transfer, the federal lien will generally take priority over any subsequent transferees, purchasers, or other interests. See IRC section 6323. In that, the IRS can enforce the federal tax lien by levy/seizure without resorting to IRC procedures or filing suit in federal district court.

Statutory lien does not exist prior to transfer:  There is generally no administrative remedy available to the IRS in this situation. If legal title to property has been transferred by the transferor or fiduciary and no lien attached prior to the transfer, the IRS generally may not levy or seize the property without first making an assessment against the transferee under IRC section 6901 or filing suit in district court. This general rule is subject to an exception:

To hold a transferee or fiduciary liable for another’s tax, the IRS mails a notice of transferee or fiduciary liability to the transferee or fiduciary’s last known address. Then if a Tax Court petition is not filed or if the liability is sustained by the Tax Court, the IRS can assess the tax against the transferee under the authority of IRC section 6901.

Assessing Liability Under IRC 6901

Under IRC Section 6901, the IRS can assess and collect the unpaid taxes, penalties, and interest from a transferee, or from a fiduciary liable under 31 USC section 3713.

Section 6901 is a procedural statute – it does not create substantive liability.  A transferee’s liability is, instead, determined by other state or federal law.

A transferee is defined under IRC section 6901(h) to include a donee, heir, legatee, devisee, and distributee, and with respect to estate taxes, any person who, under IRC section 6324(a)(2), is personally liable for such tax.

The regulations add the following examples to the definition of a transferee: a distributee of an estate of a deceased person, a shareholder of a dissolved corporation, the assignee or donee of an insolvent person, the successor of a corporation, a party to a reorganization as defined in IRC section 368, all other classes of distributees, and with respect to the gift tax, a donee. Treas. Reg. section 301.6901-1(b).

These definitions are not all-inclusive, but are merely examples of transferees.

The procedures for establishing transferee and fiduciary liability under Section 6901 are similar to standard  deficiency procedures .

A notice of transferee or fiduciary liability must be mailed to the last known address of the transferee or fiduciary.  The transferee or fiduciary may then petition the Tax Court within 90 days.

Once the liability is assessed, and after notice and demand and a refusal to pay, a statutory lien is created and attaches to all property of the transferee or fiduciary.

The period for collection of the assessment against the transferee is the IRC section 6502  collection statute of limitations  (10 years running from the assessment against the transferee).

Assessments against a transferee can be made under IRC 6901 for a transferor’s:

• income tax, estate tax or gift tax; or
• other taxes, such as employment taxes, if the transferee’s liability arises out of a liquidation of a partnership or corporation, or a corporate reorganization under IRC section 368(a).

Assessments against a fiduciary can be made under IRC section 6901 for the income tax, estate tax or gift tax due from the estate of a taxpayer, decedent or donor.

Periods of Limitation and Extensions for Assessment Under IRC 6901

Period of Limitations .   An assessment under IRC section 6901(c) for the liability of a transferee or fiduciary  is limited to one year after the assessment period against the transferor ends.  However, for an assessment against a transferee or a transferee, the limitation period is one year after the period for assessment against the preceding transferee ends, but not more than three years after the period for assessment against the transferor ends.

Fiduciary:  An assessment may be made up to one year after the fiduciary liability arises or the period for collection of the tax ends, whichever is the later.

Statutes of limitations for state fraudulent transfer statutes do not apply to IRC section 6901.

Extensions of the Period of Limitations:

The statute of limitations may be extended under several provisions:

By agreement:  Under IRC section 6901(d) prior to expiration of the assessment period a transferee may agree to extend the period of limitations; however, in the case of a transferee of a transferee, execution of an extension agreement by the initial transferee is not effective to extend the overall three-year limitations period discussed above in paragraph (b)(9) of this subsection.

IRC 6901(f):  If a notice of liability has been mailed to a transferee or fiduciary, the running of the statute of limitations for assessment is suspended for the period during which an assessment is prohibited by IRC section 6213 and for 60 days thereafter.

IRC 6501(c):  Where the statute of limitations on assessment with respect to the transferor is open because of the transferor’s tax fraud or his failure to file a tax return, then the statute of limitations remains open as to the transferee.

Burden of Proof Under IRC 6901

Transferor’s Deficiency:  A transferor’s deficiency is presumed correct, but a transferee may prove otherwise. The transferee, not the IRS, has the burden of proof on this issue. IRC section 6902(a). The transferee may not , however, relitigate a transferor’s tax liability when a court has already decided the issue.

Transferee Liability:  In a proceeding before the United States Tax Court under Section 6901, the burden is on the IRS to prove that a transferee is liable for the tax of the transferor taxpayer. IRC section 6902(a).

Fiduciary Liability:  The IRS has the burden to prove that the fiduciary paid a debt of the person or estate for whom the fiduciary is acting before paying the debts due the United States to establish fiduciary liability under 31 USC Section 3713(b). The fiduciary is not liable unless the fiduciary knew of the tax debt or had information that would put a reasonably prudent person on notice that an obligation was owed to the United States.

Establishing Transferee or Fiduciary Liability by Suit

The United States may establish transferee or fiduciary liability by filing a suit in district court pursuant to IRC Section 7402 and 28 USC  Sections 1340 and 1345. Such a suit is brought against the transferee or fiduciary and results in a judgment against the third party, permitting collection from any of the transferee’s or fiduciary’s assets.

A suit to impose transferee liability may be necessary when the procedures of IRC section 6901 are not available because the statute of limitations to create a federal tax assessment for the transferee or fiduciary has expired.

Since a suit to establish transferee or fiduciary liability is a collection suit based on the taxpayer/transferor’s federal tax liability, the ten-year statute of limitations in IRC 6502 for suits to collect taxes applies. The ten-year statute of limitations provided by Section 6324 applies for collection of estate and gift taxes if the suit is based on Section 6324 transferee liability.

A suit to establish transferee or fiduciary liability is not limited to certain types of taxes as are the assessment procedures of IRC 6901. All types of taxes, including employment and excise taxes, can be collected in a transferee suit.

A suit to impose transferee liability may be preferable to assessment when:

• the transferred property has depreciated in value;
• the transferee has concealed, disposed of, or converted the transferred property; or
• the transferee has commingled the transferred property with other property.

Burden of Proof:

The burden of proof is on the United States as the petitioning party, where liability is sought to be imposed on a third-party for another’s tax by way of a suit brought by the United States in a district court.

The burden of proof remains with the transferee, when a transferee files a refund suit.

Alternatively:  The IRS may also bring a suit to set aside a fraudulent transfer, allowing collection from property transferred into the hands of the transferee.

Defenses to Transferee or Fiduciary Liability

Transferor’s Liability Paid:  The transferor’s liability should be collected only once. Proof by the transferee that the transferor’s tax liability has been paid is a valid defense to transferee liability.

A transferee’s liability is extinguished once the tax liability is paid by the transferor or other transferee, and either the transferor waives any right to a refund or the period of limitations for seeking a refund has expired.

Because a transferee’s liability is secondary to the primary liability of the transferor, a compromise of the transferor’s liability may either reduce or extinguish the liability of the transferee.

A transferee may contest the liability of the transferor.

No liability is imposed on the transferee if it is proven that the transferor is not liable for any tax.

A prior decision on the merits of a tax liability of a transferor fixes the amount of the tax for purposes of a transferee’s liability. The transferee is barred from litigating the transferor’s liability, just as the transferor would be barred from re-litigating the transferor’s liability in another forum.

Acceptance of an offer to compromise a transferee’s liability has no effect on the transferor’s primary liability or on the liability of other transferees. Any payment by the transferee, however, reduces the transferor’s liability and, thereby, the liability of other transferees.

Other potential defenses include:

• statute of limitations;
• return of all or a part of the transferred property;
• any other defense that can be used for the type of liability asserted (e.g., that the IRS has not exhausted its remedies against the transferor).

Suit to Set Aside a Fraudulent Transfer

Rather than a suit to impose liability on the transferee, the United States may commence a civil lawsuit against the transferor and the transferee in a United States district court when the original taxpayer transferred property in fraud of a tax debt owed to the United States. Ordinarily, the suit requests that the court set aside the transfer. If successful, ownership of the property is reinstated in the transferor, and the transferor’s tax is collected from the property. This approach is generally preferable when the value of the property has increased since the transfer.

The Federal Debt Collection Procedures Act (FDCPA) provides a federal cause of action for setting aside a fraudulent transfer in a federal district court, other than the United States Tax Court. 28 USC 3301 et seq.

The United States may also use remedies available to a private creditor under applicable state law to defeat a fraudulent transfer. Generally, the law of the state in which the transfer occurs will govern.

Burden of Proof:  The burden is on the United States to prove that the transfer of the property was in fraud of a debt owed the United States. Depending on the circumstances, the United States must prove that the transfer was the result either of the transferor’s actual fraud or constructive fraud.

Statute of Limitations for a Fraudulent Transfer Suit

A fraudulent transfer suit brought by the United States under IRC Section 7402(a) to impose transferee liability on a transferee to collect on an assessment against the transferor is subject to the 10-year collection statute of limitations.  See also FDCPA, 28 USC 3003(b)(1) (FDCPA does not impose time limits on actions to collect taxes brought under provisions outside the FDCPA).

The majority of courts have found that the United States is not bound by state statutes of limitation, including the UFTA. Thus, in a fraudulent transfer suit brought by the United States pursuant to IRC 7402(a) and a state statute, the limitations period under IRC 6502 generally controls.

Defenses for the Transferee in a Fraudulent Transfer Suit

A transferee who takes property in good-faith and for a reasonably equivalent value is not affected by a transferor’s actual fraud. The transferee’s rights in the transferred property are superior to the transferor’s creditors, and the transfer will not be set aside.

To be considered a good-faith purchaser, the transferee must have been without knowledge of the fraudulent purpose of the transferor at the time of the transfer.

To qualify as a purchaser for reasonably equivalent value, the transferee must have exchanged property for the transfer. A promise to pay or payment with a nonnegotiable note is not sufficient.

If the transferee is not a good faith purchaser for reasonably equivalent value, then the transferee may be required to surrender the property or an equivalent amount of money. The transferee may also be required to provide an accounting for any rents or profits generated by the transferred property.

Even though a transfer is set aside as fraudulent, a good-faith transferee is allowed a credit for any consideration given to the transferor. The credit may be in the form of a lien on the transferred property or a setoff against any money judgment entered against the transferee. The transferee also will receive a credit for amounts expended to preserve the transferred property.

Another defense available to a transferee is a claim that he has paid other creditors of the transferor to the extent of the value of the transferred property.

Successor Liability as Primary Liability

Many state corporate merger and consolidation statutes provide that a surviving corporation is liable for the debts of a predecessor corporation when the surviving corporation results from a formal merger or consolidation of two corporations. In these cases, the surviving corporation is primarily liable for the tax debts of the predecessor corporation as a successor in interest. The successor in interest becomes the “taxpayer” and is primarily liable for the predecessor’s tax liability.

The IRS will generally assert primary liability against the successor. The IRS may also, however, seek to hold the successor liable as a transferee under the Section 6901.

Like nominee or alter ego scenarios, a taxpayer’s liability may be collected from the successor in interest through administrative collection procedures.

Nominee, Alter Ego, and Transferee Elements

Nominee and alter ego liability is distinguishable from a Special Condition Transferee NFTL and transfers for which transferee liability may be asserted, including fraudulent transfers. Nominee and alter ego often share common facts, but are different from fraudulent transfers.

Simulated Transfer Versus Actual Transfer:   Often, a nominee and alter ego is based on a  simulated transfer to a fictitious entity owned and controlled by the taxpayer. The simulated transfer is not intended to divest the transferor of any rights to the property.

Transfer of Legal Title Not Required:  A transfer of legal title is not necessary to prove a nominee or alter ego relationship exists.  Sometimes the transfer by the taxpayer is indirect.

Nominee:  A tax liability may be collected from the taxpayer’s property held by a nominee.

Typically, a taxpayer places the taxpayer’s assets(s) in the name of another person or entity, but control of the asset(s) and other incidents of ownership remain with the taxpayer. The transfer is “in name only.” In other words, in a nominee situation, a separate person or entity, such as a trust, holds specific property for the exclusive use and enjoyment of the taxpayer.

Alter Ego:  A tax liability may also be collected from the taxpayer’s alter ego.

The alter ego theory focuses on the relationship between the taxpayer and alleged alter ego entity.

The taxpayer usually establishes an entity (often a corporation) and transfers assets to it, but there is such unity of ownership and interest between the taxpayer and the entity that the entity is not considered a genuine separate entity.

Have a question? Contact Jason Freeman , Freeman Law, Texas.

Mr. Freeman is the founding and managing member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney. Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He was honored by the American Bar Association, receiving its “On the Rise – Top 40 Young Lawyers” in America award, and recognized as a Top 100 Up-And-Coming Attorney in Texas. He was also named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas” by AI.

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Table of Contents

How property transfer in probate works

How to avoid property transfer in probate.

If you die without a will, called dying intestate , your state's probate court decides where your property goes. Intestate succession laws vary by state, but your property will generally pass to your next of kin or the state if no relatives can be found.

Without a will, probate — the process of distributing your assets after your die — can be a longer, more complex process for your loved ones. Estate planning tools such as wills, trusts, transfer-on-death deeds and payable-on-death designations can simplify the process.

» Estate planning? Here's a 7-step checklist to get started

Most estates must go through probate, but the process can look different depending on whether you have a will.

With a will

Probate begins when the last will and testament and a certified copy of the death certificate are submitted to the county court of the deceased. 

The executor named in the will handles the estate administration. This includes distributing property and accounts to beneficiaries and ensuring that outstanding debts, taxes, and funeral expenses are paid.

If you have beneficiary-designated accounts such as life insurance and retirement accounts, those assets will pass directly to the beneficiaries named without passing through probate.

» MORE: The pros and cons of handwriting a will

Without a will

Your local probate court follows your state's intestate laws, typically using the next-of-kin designation to determine beneficiaries and distribute the assets accordingly. 

The state can take possession of the property in a process called escheat if the probate court is unable to contact any next-of-kin to name heirs . 

If the property is solely owned, heirs designated by the court must sign, notarize, and submit an affidavit of heirship to the court before the transfer of the property deed can occur. 

If the property is jointly owned, the surviving owner is generally considered the heir. The surviving owner must submit a certified copy of the deceased owner's death certificate and an affidavit of survivorship to the probate court to transfer sole ownership. 

» Learn more: How joint tenancy with rights of survivorship works

Transfer on death deed

Property held in a transfer on death (TOD) deed automatically transfers to a beneficiary when the owner dies. This estate planning tool keeps the property from going through probate.

A TOD deed is relatively simple to create, but it's only available in about half of U.S. states.

Payable on death bank account

A payable on death (POD) account works similarly to a TOD deed by transferring a bank account directly to a beneficiary upon the owner's death.

To claim the account, the beneficiary will need to provide the bank with their identification and a certified copy of the account owner's death certificate .

Property held in a trust — a legal arrangement that authorizes someone else to handle your assets — also bypasses probate. Many types of trusts exist for different purposes, and some trusts can reduce estate taxes.

Trusts can give you greater control over your assets, but they can be more expensive and time-consuming to set up than other estate planning tools.

» Learn more: The difference between a living trust and a will

Wills aren't required, but they can significantly reduce complications in the probate process and ensure that your wishes are honored in the event of death. You can write a will with an estate planning attorney or through online will-writing software.

» Need some help? Check out our roundup of the best online will makers

On a similar note...

Compare online will makers

Should You Tap Home Equity to Pay Your Bills?

Think carefully before using the equity in your home to pay off other debt.

Tapping Home Equity to Pay Bills

Getty Images

Using home equity to consolidate and pay off debt may help you lower the interest you pay, but you could lose your home to foreclosure if you fail to make your payments.

Key Takeaways

• There are several options to access your home's equity to help with debt payments, but it's important to consider the drawbacks.
• Borrowing against your home's equity may provide you with a lower interest rate and a consolidated payment, but it also puts your house on the line as collateral.
• Consider other options, such as applying for a balance transfer credit card or debt consolidation loan, adding a second stream of income, or borrowing from family.

Carrying debt is rarely a good idea even in the best of times, but it can be especially damaging when interest rates are rising.

Higher rates mean increased costs for borrowers. If you have piled up expensive credit card debt or other obligations, your monthly payment might continue to swell as interest rates march higher.

Some people may be tempted to use the equity they have built in their home to eliminate the outstanding debt. But is that a good idea? Before making such a move, it is important to understand the pros and cons of using home equity.

How To Use Home Equity to Pay Off Debt 

In recent years, home values have soared in many parts of the country. That means millions of homeowners – even those who are deep in debt – have likely built up quite a bit of equity in their homes.

Your home's equity is the amount your property is worth, minus the dollar amount of the mortgage that remains on the property. There are several ways to use this home equity to pay off debts, which include:

• Cash-out refinance. A cash-out refinance allows you to use your home's equity to borrow for a larger amount than your original mortgage. You can use that extra money for any purpose you like, including paying off debt. 
• Home equity loan. This type of loan provides you with a lump sum that typically must be paid back at a fixed interest rate. The loan is based on the equity in your home, and the home itself serves as collateral. 
• Home equity line of credit. Also known as a HELOC, this type of borrowing tool works much like a credit card in that you are allowed to borrow up to a certain limit and must pay back what you owe at regular intervals. Although similar to a home equity loan, a HELOC usually features variable rates that change over time.

HELOC vs. Home Equity Loan

Kristen Hampshire July 27, 2023

Pros and Cons of Using Home Equity to Pay Off Debt 

Perhaps the biggest advantage of using home equity to consolidate and pay off debt is that you might significantly lower the interest you pay.

"Typically, it's a lower rate than credit cards or personal loans, which can result in savings over time," says Kevin Lum, a certified financial planner and founder and CEO of Foundry Financial in Los Angeles.

For example, it is likely that a home equity loan or HELOC will have an interest rate that is much lower than the rate you would pay on credit card debt.

In addition, using home equity to consolidate your debts can offer you greater convenience. "It allows you to consolidate your debt into one manageable monthly payment," Lum says.

However, using home equity to pay off debt also has its drawbacks. When you borrow against your home's equity, the home itself serves as collateral. If you fail to make your debt payments, you could lose your home to foreclosure.

"This is the most significant risk associated with using home equity to pay off debt," Lum says.

Home equity loans often have longer repayment periods than other types of debt, "which means you could be paying off this debt deep into retirement," Lum says.

Catherine Valega, a certified financial planner and wealth consultant with Green Bee Advisory, says those who borrow against the equity in their home need to remember that the money is not a gift.

"It's not a free pass – you still have to make the loan payments," she says. "So, your cash flow must have the room to allow you to make the extra payments."

Home Equity Loan vs. HELOC

A home equity loan and a home equity line of credit both let you borrow against the equity you have built up in your home. But some important differences separate these two types of borrowing.

With a home equity loan, your ability to borrow comes in the form of a lump sum payment. Typically, the loan will have a fixed rate, and you will gradually pay off the loan at that rate.

A home equity line of credit offers a set amount of money that you can borrow from at any time during what is known as the "draw period." Once you enter the repayment phase, you can no longer access the line of credit and must pay back your HELOC's principal and interest balance. Usually, a HELOC has a variable rate. That means that over time, your payments could grow larger – or smaller – as interest rates change.

How to Apply for a Home Equity Loan 

Each lender has its own rules regarding how to apply for a home equity loan. As with any loan, the strength of your credit profile will largely determine whether you are approved and at what rate. In addition, a higher score might give you access to more of your equity.

Be sure to examine your credit report to make sure there are no errors. Once you are satisfied that your score is in good shape, compare lenders to get the loan you need at the best rate. By law, each lender is required to provide you with a loan estimate that comes in a standard format, making it easier to compare loan offers from various lenders. The estimate contains:

• The terms of the loan
• The interest rate you will be charged
• Closings costs and other fees

During the application process, the lender will likely have your home appraised to establish its worth.

You might need to provide additional information, such as:

• Gross monthly income
• Property taxes, insurance costs and homeowners association dues
• The date the home was built

If your loan is approved, you will then close on the loan and have access to the cash.

Should You Use a Home Equity Loan? 

Your individual goals and circumstances will determine whether a home equity loan is the right choice for you. The best candidates are those who:

• Have a substantial amount of equity built up
• Have a strong credit score and a low debt-to-income ratio
• Want the security of a fixed interest rate – as opposed to the adjustable rate that is likely to come with a HELOC – and monthly payments that do not change

However, even if using a home equity loan to pay off debt seems like a good option, Lum cautions against using this as a Band-Aid for your debt problems.

"If you haven't gotten the root cause under control, you'll be back in the exact same situation in the future – except it could be much worse," he says.

Alternatives to a Home Equity Loan for Debt Consolidation

Although using a home equity loan to pay off debt can be an effective strategy for some, other options might be better.

Some people find that a home equity line of credit offers more flexibility than a home equity loan. With a HELOC, you can tap the equity only if and when you need it, and in the precise amount.

In some cases – particularly if the debt is smaller – you can become debt-free simply by cutting back on spending and using all available extra income to pay down debt as aggressively as possible.

"Cut expenses and create an additional income stream to begin paying off your debt at a more rapid pace," Lum says. He suggests developing a side hustle or taking a second job as good methods of generating more money.

Another option is to sell assets to raise cash to pay off your debts.

Valega also suggests borrowing from loved ones as a cheaper alternative to tapping your home equity. "I'm a big fan of intrafamily loans," she says.

Such loans have interest rates established by the IRS and known as the applicable federal rate, which "tends to be much lower than what you’ll find in the current market options," Valega says.

Lum also suggests rolling over your debt to a credit card that offers an interest-free promotional period for several months or longer.

Finally, you could consider a debt consolidation loan. "These are personal loans that combine all your debts into one loan with a potentially lower interest rate," Lum says.

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• transfers defraud creditors law and practicalities

Transfers to Defraud Creditors - The Law and the Practicalities

 A judgment is only a piece of paper obtained at the end of litigation until it is used to seize a debtor’s assets or to force a debtor to pay the debt. See our article on Debt Collection-the Tools Available to Collect Judgments for a detailed analysis of the tools available.

Some judgment debtors, realizing that the writs of attachment are soon to be issued by the Court, decide to hide their assets, often transferring them to relatives or friends, sometimes to entities out of state or out of the Country, sometimes simply putting them under false names.

The courts have long recognized this tendency on the part of debtors and the legislature, as well, has passed various statutes giving judgment creditors the power to void the transfers under certain circumstances.

While the Act and the cases generally refer to “fraudulent transfers” in reality the relief provided is not that related to the typical Fraud action but is honed to the particular circumstances surrounding a debtor seeking to evade judgment.

This article shall outline the statutory scheme and give some practical advice to both judgment creditors and judgment debtors

The Basic Law:

Where a creditor has a claim against a debtor's assets, whether by judgment or otherwise, that debtor may not convey or otherwise dispose of such property in an effort, or to the effect, to deprive the creditor of her legitimate right to recover such assets as may satisfy the obligation due the creditor.

A fraudulent conveyance is a transfer by a debtor of property to a third person undertaken with the intent to prevent a creditor from reaching that interest to satisfy its claim.  Yaesu Electronics Corp. v. Tamura (1994) 28 Cal. App. 4th 8, 13.

  I. Uniform Fraudulent Transfer Act.

Cal. Civ. Code § 3439 et seq. embodies the current regime of California law – known as the Uniform Fraudulent Transfer Act.  The UFTA prohibits debtors from transferring or placing property beyond the reach of their creditors when that property should be available for the satisfaction of the creditors' legitimate claims.  A transfer under the UFTA is defined as “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset …, and includes payment of money, release, lease, and creation of a lien or other encumbrance.” Cal. Civ. Code § 3439.01(i).

The UFTA provides remedies only to those creditors to whom a debt, as defined in § 3439.01, is owed.  Whether the creditor's claim arose before or after the debtor made the transfer or incurred the obligation, four (4) distinct grounds for finding a fraudulent transfer exist:

(i) Cal. Civ. Code § 3439.04(a)(1) designates as fraudulent any transfer made or obligation incurred by a debtor with actual intent (determination of "actual intent" depends on the assessment of eleven factors, see infra Actual Fraudulent Intent for § 3439.04(a)(1) Determined by § 3439.04(b)) to hinder, delay, or defraud any creditor of the debtor;

(ii) Cal. Civ. Code § 3439.04(a)(2)(A) designates as fraudulent (and presumes fraudulent intent) a transfer made or obligation incurred without receiving reasonably equivalent value where the debtor was engaged or about to engage in a business or transaction with unreasonably small remaining assets in relation to the business or transaction;

(iii) Cal. Civ. Code § 3439.04(a)(2)(B) designates as fraudulent (and presumes fraudulent intent) a transfer made or obligation incurred without receiving reasonably equivalent value where the debtor intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as the debts became due;

(iv) Cal. Civ. Code § 3439.05 designates as fraudulent (and presumes fraudulent intent) a transfer made or obligation incurred without receiving reasonably equivalent value where the debtor was insolvent at the time of making the transfer or incurring the obligation or became insolvent as a result of the transfer or obligation.

It is not necessary that the transferor acted maliciously or with a desire to harm his creditors.  See Economy Refining & Service Co. v. Royal Nat'l Bank (1971) 20 Cal. App. 3d 434, 441.  The Economy Refining & Service Co . Court held that it was the debtor's intent to make the transfer, rather than some evil intent to harm the creditor, which sufficed for finding intent to defraud.  Id . ("actual intent to defraud consisted of the intent [. . .] to remove the assets and to make impossible the collection of appellant's judgment").  Furthermore, in the words of one court:

Mere intent to delay or defraud is not sufficient; injury to the creditor must be shown affirmatively.  [. . .]  It cannot be said that a creditor has been injured unless the transfer puts beyond [her] reach property [she] otherwise would be able to subject to the payment of [her] debt.

Mehrtash v. Mehrtash (2001) 93 Cal. App. 4th 75, 80.

II. Actual Fraudulent Intent for § 3439.04(a)(1) Determined by § 3439.04(b).

The "actual intent" referred to in § 3439.04(a)(1) is determined upon consideration of eleven (11) factors set out in § 3439.04(b).  See also Filip v. Bucurenciu (2005) 129 Cal. App. 4th 825, 834 (factors are not mathematical formula, but to provide guidance to court, not compel finding one way or other).  Cal. Civ. Code § 3439.04(b) states:

In determining actual intent under paragraph (1) of subdivision (a), consideration may be given, among other factors, to any or all of the following:

(1) Whether the transfer or obligation was to an insider.

(2) Whether the debtor retained possession or control of the property transferred after the transfer.

(3) Whether the transfer or obligation was disclosed or concealed.

(4) Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.

(5) Whether the transfer was of substantially all the debtor's assets.

(6) Whether the debtor absconded.

(7) Whether the debtor removed or concealed assets.

(8) Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.

(9) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.

(10) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred.

(11) Whether the debtor transferred the essential assets of the business to a lien holder who transferred the assets to an insider of the debtor.

Finding actual intent is a question of fact to be established by the trial court with the burden of proof on the party asserting the fraudulent intent and upon a showing by a preponderance of the evidence.  E.g. People ex rel. Allstate Insurance Co. v. Muhyeldin (Cal. App. 2d Dist. 2003) 112 Cal. App. 4th 604, 611.

III. Constructive Fraudulent Intent Where Actual Intent Irrelevant.

There are two (2) forms of constructive fraud grounding creditor claims which arose either before or after the transfer under the UFTA.  The first, Cal. Civ. Code § 3439.04(a)(2)(A), provides that a transfer is fraudulent if the debtor did not receive reasonably equivalent consideration and  "[w]as engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction."  The second, Cal. Civ. Code § 3439(a)(2)(B), provides that a transfer is fraudulent if the debtor did not receive reasonably equivalent consideration and "[i]ntended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due."

In a related manner, Cal. Civ. Code § 3439.05 provides that a transfer is fraudulent as to an existing creditor if the debtor does not receive reasonably equivalent value and "was insolvent at that time or . . . became insolvent as a result of the transfer . . . ."  Cal. Civ. Code § 3439.02 defines insolvency and § 3439.02(c) allows a presumption of insolvency where a debtor is generally not paying his debts as they become due.  In other words, this section acts to prevent a debtor from transferring his last assets at unreasonably low value, thereby depriving the creditor of an existing claim on the assets, if the debtor was insolvent or became insolvent because of the transfer.

IV. Time to Bring a Claim: Statutes of Limitations.

Cal. Civ. Code § 3439.09 provides that no action may be brought for fraudulent transfer more than seven (7) years after the transfer was made notwithstanding any other provision of law.  Where actual intent to defraud can be shown pursuant to § 3439.04(a)(1), an action must be brought within four (4) years after the transfer was made, or, if later, within one year of when the transfer was or could reasonably have been discovered by the claimant.  Where fraudulent intent is imputed by statute–§§ 3439.04(a)(2)(A), (B) and § 3439.05–an action must be brought within four (4) years of the time the transfer was made, otherwise it is time-barred.

V. Remedies Available under UFTA.

Where a debtor has fraudulently transferred property subject to a creditor's claim, the UFTA provides several remedies pursuant to Cal. Civ. Code § 3439.07 (Creditor's Remedies).  Cal. Civ. Code § 3439.07 (Creditor's Remedies) reads:

                  (a) In an action for relief against a transfer or obligation under this chapter, a creditor, subject to the limitations in Section 3439.08, may obtain:

                              (1) Avoidance of the transfer or obligation to the extent necessary to satisfy the creditor's claim.

                               (2) An attachment or other provisional remedy against the asset transferred or its proceeds in accordance with the procedures described in Title 6.5 (commencing with Section 481.010) of Part 2 of the Code of Civil Procedure.

                               (3) Subject to applicable principles of equity and in accordance with applicable rules of civil procedure, the following:

                                           (A) An injunction against further disposition by the debtor or a transferee, or both, of the asset transferred or its proceeds.

                                           (B) Appointment of a receiver to take charge of the asset transferred or its proceeds.

                                           (C) Any other relief the circumstances may require.

                   (b) If a creditor has commenced an action on a claim against the debtor, the creditor may attach the asset transferred or its proceeds if the remedy of attachment is available in the action under applicable law and the property is subject to attachment in the hands of the transferee under applicable law.

                   (c) If a creditor has obtained a judgment on a claim against the debtor, the creditor may levy execution on the asset transferred or its proceeds.

                   (d) A creditor who is an assignee of a general assignment for the benefit of creditors, as defined in Section 493.010 of the Code of Civil Procedure, may exercise any and all of the rights and remedies specified in this section if they are available to any one or more creditors of the assignor who are beneficiaries of the assignment, and, in that event (1) only to the extent the rights or remedies are so available and (2) only for the benefit of those creditors whose rights are asserted by the assignee.

Although some transfers are voidable under § 3439.07, Cal. Civ. Code § 3439.08(a) embodies the good faith exception to the voidability remedy.  Where a debtor transferred assets with actual fraudulent intent, pursuant to § 3439.04(a)(1), § 3439.08(a) provides that the transfer is not voidable against a person who took for reasonably equivalent value and on good faith, or against subsequent transferees.  The transferee's good faith or knowledge of the debtor's fraudulent intent may be inferred where the transferee had notice of facts and circumstances sufficient to induce a prudent person to inquire into the transferee's purpose.  See Boness v. Richardson Mineral Springs (1956) 141 Cal. App. 2d 251, 261.

To the extent the transaction is voidable pursuant to § 3439.04(a)(1), a creditor may obtain judgment to recover from one other than a good faith transferee the asset or the value of the asset under § 3439.08(b).  However, where the transferee is of good faith, that transferee may retain his/her interest or rights to the extent of value given to the debtor for the asset.

VI. Common Law Fraud Actions Still Available.

The UFTA is not the exclusive means by which a wronged creditor may attack a fraudulent conveyance.  Creditors may pursue common law actions against debtors who have transferred assets to deprive the creditor of a right to recover their debts.  See Macedo v. Bosio (2001) 86 Cal. App. 4th 1044, 1051.  If creditors pursue a common law action, the statute of limitations is established by Cal. Code Civ. Proc. § 338(d) and the cause of action accrues not when the fraudulent transfer occurs but when the judgment against the debtor is secured.  Id .  Cal. Code Civ. Proc. § 338(d) provides a limitations period of three (3) years within which to bring a claim based on fraud: "An action for relief on the ground of fraud or mistake. The cause of action in that case is not deemed to have accrued until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake."

Practicalities:

Any debtor thinking about transferring funds to protect them from creditors must realize that merely transferring them does not do much more than enlarge the litigation to include family and friends who were unfortunate enough to be included in the transfers. Any aggressive creditor…and most creditors are aggressive…who has competent legal counsel will quickly file the requisite action and the family member may find him or herself facing substantial legal fees and prolonged unpleasant litigation.

Practically speaking, if the transfer occurred after the debt was obviously leading to judgment and if the transfer was not for valid consideration, one is merely asking for litigation by such transfers and a payment program would probably make more sense.

On the other hand if there is a legitimate consideration and the transfer is part of an ongoing business relationship, it is quite possible that the cause of action will not prevail. Remember, the creditor has the burden of proof of establishing that the transfer was to defraud creditors.

For judgment creditors, one should not lose hope when a judgment debtor reveals that he or she has no assets. Quite often an Order of Examination or a report by an investigator will demonstrate a pattern of such transfers which may justify prompt and effective demands for the return of the assets from the third party transferees.

Such transfers are so tempting and so typical that the effort to retrieve the assets is well known in the Courts and the simple rule that is applied (the closer to the judgment and the less the consideration paid by the transferee, the easier a case to prove) can often result in successful collections from a judgment debtor once thought without assets.

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ProSomnus’ Chapter 11 Bankruptcy Filing in Delaware Signals $27,000,000 Debt Reduction and Equity Transfer

T he market for devices that treat obstructive sleep apnea is highly competitive, with companies vying for dominance in the rapidly evolving healthcare space. According to Jefferies, ResMed (RMD) currently holds the title of global leader, commanding 62% of the market with its CPAP and BiPAP devices. Despite formidable competition from firms like Inspire Medical Systems (INSP) and Fisher & Paykel Healthcare, ResMed remains at the forefront.

However, the industry was shaken in 2021 when Philips Respironics, a division of Koninklijke Philips (PHG), exited the market following a significant recall of its CPAP, BiPAP, and ventilator devices. Their return is still uncertain, leaving a gap for other players to exploit.

ProSomnus Offers a Precision-Based Solution

ProSomnus (OSAP), a relatively smaller player in this sector, offers a unique alternative: personal, precision intraoral devices designed to treat obstructive sleep apnea non-invasively. They argue that discomfort and poor education about the usage of CPAP devices contribute to high non-adherence rates. ProSomnus believes that their precision devices can better serve patients with mild to moderate conditions.

Despite their promising solution, the company has faced challenges convincing patients to adopt their technology over established devices.

ProSomnus Files for Chapter 11 Bankruptcy

On May 7, ProSomnus filed for Chapter 11 bankruptcy in Delaware after securing a restructuring support agreement. This agreement aims to reduce the company’s secured obligations by $27 million and hand over common equity to the company’s subordinated noteholders. In their filing, the debtor disclosed over $26.3 million in assets and $52.89 million in debt.

The bankruptcy petition lists significant financial obligations, including:

• $17.5 million in senior convertible notes
• $3.39 million in senior exchange notes
• $5.3 million in subordinated convertible notes
• $12.1 million in subordinated exchange notes
• $4 million in bridge notes
• $3.3 million in unsecured debt

To ensure operations and the bankruptcy case are funded, ProSomnus is seeking $13 million in debtor-in-possession (DIP) financing from the sponsoring noteholders, which include CrossingBridge Low Duration High Yield Fund, Cohanzick Absolute Return Master Fund, RiverPark Strategic Income Fund, and others.

Funding a Path Forward

ProSomnus intends to secure exit financing worth approximately $9 million through a new equity purchase. This funding, combined with the DIP financing, is expected to help the company reorganize and find a sustainable path forward.

ProSomnus, established in 2006 and known as DTI Holdings Inc., initially operated dental laboratories. It later pivoted to the sleep apnea business and went public in 2022 through a de-SPAC transaction. Despite filing for bankruptcy, the Pleasanton, California-based company managed to generate $27.7 million in revenue in 2023, marking a significant increase from the previous year. With a workforce of 142 employees across North America and Europe, ProSomnus is positioned to navigate its current financial challenges with the help of the restructuring process.

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• Sale of a Property in Russia

The sale and purchase of real estate in Russia are governed by the Civil Code . Under this law, foreign citizens are subject to certain restrictions related to the ownership of certain types of properties, however, if they decide to sell property in Russia , there are no such restrictions.

Foreign or Russian citizens deciding to sell real estate property in this country can benefit from legal assistance offered by our law firm in preparing the documents related to such a transaction. Our lawyers in Russia are specialized in offering a wide variety of legal services, including guidance in starting a business for foreign entrepreneurs.

Real estate ownership rights in Russia

According to the Civil Code , there are several ways in which ownership over real estate can be acquired. When selling a property in Russia , it is important for the owner to know their rights over the property. The following types of ownership right are acknowledged in Russia:

• -          land plots or real estate properties which have been inherited by the current owners, which can be sold without any legal problem;
• -          mortgaged properties which cannot be sold without prior notification to the bank and the person to buy the real estate.

In the latter situation, the buyer will be required to assume the mortgage over the property. However, it is good to know that mortgaged property sales are very rare in Russia .

Preparing the Russian property for sale

The main steps for selling a property in russia.

The owner of a Russian property is not required to complete any specific steps when selling unless he or she wants to. One can advertise the sale of the respective property on specialized websites or with real estate agencies .

When preparing the sale of a real estate , the proprietor must ensure that:

• -          they have all the documents which need to be presented during the transaction;
• -          they are the owners of the properties – the property deed must bear their name;
• -          they draft a pre-sale or directly a sale-purchase agreement with the buyer;
• -          they have paid all the taxes related to owning a property, according to the Russian law;
• -          they provide all the documents the buyer will need to register the property on their own name.

It is also important to know that the seller of a property has the right of verifying the person or company when selling real estate in Russia . The real estate due diligence procedure can be ensured by our law firm in Russia on behalf of both sellers and buyers.

Selling commercial real estate in Russia

The sale of commercial properties in Russia is quite common, as many foreign companies setting up operations here are also interested in acquiring office buildings or land plots in order to carry out their operations. While, there are certain restrictions related to the purchase of land plots in certain areas, the purchase of private-owned commercial real estate is permitted.

It is important to note that the sale of commercial real estate will imply a thorough verification of the buyer and assistance from a law firm in Russia .

Another aspect to consider is that commercial real estate sales can be part of an acquisition deal for an entire business, case in which specific clauses apply. Our attorneys in Russia can guide local companies interested in selling real estate as part of an acquisition deal by complying with the legislation in this sense.

Documents needed when selling real estate in Russia

Both the  seller and the buyer  need to prepare a set of documents when  completing a real estate transaction . This set of documents must comprise:

• -          the identification papers (ID or valid passports) of both the seller and the buyer;
• -          the sale-purchase agreement which must be signed by both the seller and buyer;
• -          the property title which must be brought by the seller upon the completion of the transaction;
• -          the power of attorney, if one of the parties has enabled a third person to complete the transaction on their behalf;
• -          the mortgage holder’s consent, if the property is subject to a mortgage.

Our  Russian lawyers  can help the seller prepare the documents when such a transaction is completed. We can also offer representation during the transaction if the property owner is not the country at that moment. We only need a  power of attorney  to represent them.

Once the transaction is completed, we can also make sure the former owner no longer appears in the Land Register’s records in order to avoid paying any additional taxes.

The video below presents the main steps required to sell real estate property in Russia:

Fees and taxes for selling properties in Russia

• - the expedited registration (which can take up to two weeks); a fee has to be paid per entry and if the purchased property is a building that has land, a separate fee is necessary for registering the land as well;
• - the usual registration (which takes up to four weeks). 

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I asked a financial planner who should consider debt consolidation

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• There are several options for debt consolidation with their own pros and cons.
• Debt consolidation can turn debt into a manageable problem, but it doesn't get rid of the problem.
• Before pursuing debt consolidation, make sure you understand why you got into debt to begin with.

With rising inflation and steep interest rates, it's harder to stay ahead of expenses. A lot of people I know — friends, family, and money-coaching clients — are struggling with high-interest debt. According to the Federal Reserve, credit card debt was at $1.13 trillion in the fourth quarter of 2023, up $50 billion from the previous quarter .

While I don't have any high-interest debt, a lot of people I know have been saddled with crippling credit card debt.

There might be a lot of reasons you might want to consider debt consolidation, says Alex Ammar, a certified financial planner, investment advisor, and founder of Paradox Wealth , an advice-only, fee-only financial planning firm.

I asked Ammar to learn about the pluses, minuses, and misconceptions of debt consolidation .

Know your debt consolidation options

There are myriad reasons you might be shouldering debt. You might've racked up a high amount of high-interest debt, perhaps by taking out a personal loan or racking up credit card balances. Or perhaps things got out of control by taking out payday loans, which are often seen as predatory because of their staggeringly high interest rates. You might also want to consolidate your debt to simplify your payment situation.

First, you'll want to get your head around the different debt consolidation options.

1. Balance transfer credit cards

One option is to move your credit card debt onto a balance transfer credit card , which usually features a 0% APR introductory rate, which is often from around six to 18 months.

After the introductory period ends, the standard rate kicks in. The goal is to pay off your balance during the introductory period to save on interest rates. While balance transfer credit cards can save you on interest, they come tacked with fees, usually 3% to 5% of the balance amount.

2. Home equity lines of credit

HELOCs require homeowners to offer their homes as collateral to back up the loan. In case they can't make payments, the lender can seize their homes to recover their money.

Besides the risk of potentially losing your home, HELOCs are a bit fraught with danger, because they often have variable interest rates — unless you have a specific arrangement with your institution that's providing the loan, says Ammar. "Usually, they'll only offer the fixed rates on the front end," he says. "If you agree to take out a certain amount, then they'll give you a fixed loan on that HELOC just to start it off, then kick it over to a variable rate."

3. 401(k) loans

You can borrow up to half or $50,000 — whichever is less — from your 401(k) to pay off debt. You need to repay the loan you take out against your 401(k) within five years.

While the interest rate and penalties might be less steep than those of other forms of debt consolidation, choosing this route will set you back on your retirement goals. Plus, as 401(k)s are tied to your job, if you leave your job, you'll be required to pay back the loan in full right away.

Ammar offers the following example: You borrowed the entire $50,000 and have $35,000 left to pay off. When you exit from your employer, that total amount is due.

"Now, what happens if you don't? It's not like the end of the world, but now you have to pay taxes and early withdrawal because it's basically like you pulled money out of a 401(k) prematurely," says Ammar.

4. Work with a debt consolidation company

Debt consolidation companies often charge high fees for something that you can do yourself, which is to contact the credit card companies and ask for a lower interest rate. Credit card companies might be open to this because they would rather collect than not collect on what you owe them, explains Ammar. But the trade-off is that they're going to close down your credit lines once you've paid off your balance.

"One of the misconceptions that comes up is that people think that this is going to save their credit," he says. "A lot of times, these debt consolidation efforts can be quite detrimental and destructive to your credit."

Debt consolidation can help keep your debt at a manageable level

There are a lot of reasons you might want to pursue debt consolidation. The main advantages of debt consolidation are:

• Lowering your interest rates
• Simplifying your payments 
• Getting your debt to a manageable level

"If you don't have a manageable debt situation, then you're in a hole that you can't dig out of, and it's just going to get worse," says Ammar.

And while compound interest can really be a force for building wealth and preserving wealth over time, it can also really cripple you on the other side, he explains. "When you're talking about people that have accumulated moderate- or high-interest debt, it can snowball."

The downsides and limits of debt consolidation

One downside of debt consolidation is that you have to pay fees, no matter which option. "There are very few consolidation options that come with no consequences," says Ammar. "You have to make a decision, and oftentimes you're between a rock and a hard place. But being buried in debt is just so detrimental that a lot of the times the consequences of debt consolidation seem palatable."

One of the biggest misconceptions about debt consolidation is that it reduces your debt. A lot of times it doesn't — it just moves it into a different bucket. "So from a psychological perspective, it's like, 'OK, great. Now I don't have to pay interest anymore,'" says Ammar. "So you keep spending the way you were spending. But in actuality, all you did was just move your debt into this bucket. You still owe the exact amount of money."

So when exploring options, know that debt consolidation doesn't make your debt load disappear — it typically either can bump down your monthly payment by stretching out your term or lower your interest fees.

Get to the root of your why

Be careful not to hit "pause" to examine how you've found yourself in this situation — carrying a high-interest debt balance — to begin with. "If you don't investigate the underlying cause of your indebtedness, you can easily find yourself in the same situation or worse," says Ammar. "Watch out for digging a new hole."

If your reasons for racking up a lot of debt were purely circumstantial, then you might have less inner work to do, says Ammar. But if it was because of overspending, you might have to learn the basics of budgeting and learn how to be accountable for your decisions.

To stay on top of your credit card spending, consider checking your credit card statements every day and transferring money over every day into a sub-savings account to cover the balance. "While doing that doesn't help you from a credit perspective, it helps you understand the implication of the swipe," says Ammar.

Know your objectives and have a backup plan

When deciding whether to consolidate debt, it's important to understand your goals and which method is best for your situation, says Ammar.

You'll also want to do some introspection on how you got here and whether it was circumstantial or systemic. If it is systemic, asks Ammar, "What are you going to do now before you engage in this effort to work on that before you go and put a Band-Aid on a bullet hole?"

It's a good idea to come up with a backup plan. If you find yourself in a situation where you are racking up more debt, what will you do? Or what if you unexpectedly get laid off and need to pay back your 401(k) loan? "Most of the time, things don't go according to plan," says Ammar. "It's best to be prepared."

Watch: What happens when the US debt reaches critical levels?

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ABC7 On Your Side

Expert tips to pay off your credit card debt, including specific methods to become debt free.

LOS ANGELES (KABC) -- More Americans are racking up credit card bills and falling behind on payments. Here are some expert tips to get those balances paid down, including specific methods to get you on the road to being debt free.

A recent report from Nerdwallet found that Americans owe a total of $1.21 trillion in credit card debt.

"So this year we found that credit card debt is up 16% compared to a year ago, and that's not the only form of borrowing that costs more...mortgages, student loans and auto loans are also up, which is putting a lot of people in a very tough situation when it comes to being able to repay those loans," said Sara Rathner with Nerdwallet.

Rathner says the first step to paying down debt is to make a list of all the amounts you owe and the interest rate for each debt. Then make a debt payoff plan.

"And that idea is to keep you motivated and organized while you make debt payments," she said.

One popular method is "debt avalanche," where you prioritize the debt with the highest interest rate first, then move to the debt with the next highest interest rate on your list.

Or you could try a "debt snowball," where you focus on the debt with the lowest balance and keep moving your way up to higher balances.

Rathner says you can also try to lower the interest rates on your cards.

"Start by calling the number on the back of your credit card and talk to somebody in customer service and see if you'd be eligible for a lower credit card interest rate," she said.

You can also look into balance transfer credit cards.

"You typically have to pay a small fee. It's 3% to 5% of the transferred balance, so it's something to budget for. But if what you can stand to save on interest is higher than that fee, it does become worth it," she said.

And if you're struggling to make just minimum monthly payments, Rathner says there's help available.

"Look for a nonprofit credit counseling service. They can help you with your budgeting, with debt negotiations, and with other actions you can take to help make your debt a little bit more manageable," she said.

Join us every weekday morning on Eyewitness News at 5 a.m. for our new segment, ABC7 On Your Side. John Gregory has you covered on money-saving tips, including tricks to save on your bills, smart negotiating tactics, plus where you can score free stuff!

MORE : Expert offers insight into questions about debt, credit cards

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Home » Home » How Do I Transfer a Property Title in Pennsylvania? Essential Steps and Procedures

How Do I Transfer a Property Title in Pennsylvania? Essential Steps and Procedures

By Space Coast Daily  //  May 10, 2024

To transfer property in PA is a legal process that ensures the rightful ownership of real estate is recorded and recognized by law. When you’re involved in the buying or selling of property, or need to transfer ownership due to life events such as inheritance, it’s essential to understand the steps required for a successful title transfer.

Your journey through a property title transfer begins with preparing the necessary documents, which typically include a deed that legally conveys the property from the current owner (the grantor) to the new owner (the grantee). As part of the process, you must ensure that the deed is completed with accurate details about the property and the terms of the transfer. It is crucial to check that the grantor is of legal age and mentally competent to make such transactions, as failure to meet these requirements may invalidate the transfer.

Once the deed is executed, it’s not just a matter of handing over a piece of paper; the transfer must comply with state regulations. In Pennsylvania, after the deed is signed and any applicable transfer taxes are paid, it is necessary to record the deed with the county recorder of deeds in the jurisdiction where the property is located. This recording formally establishes the title change and cements your ownership in the public records, ensuring your rights as the property owner are protected.

Understanding Property Titles in Pennsylvania

When dealing with real estate in Pennsylvania, comprehending the nuances of property titles is fundamental. Your ownership rights and the security of your real estate investment hinge on a clear title.

Definition of Property Title

A property title is the legal documentation that signifies your ownership of real estate. It’s not a physical document but a concept that encompasses the bundle of rights associated with the property. Having a title means you have the rights to use, control, and transfer ownership of the property.

Significance of Title in Real Estate Transactions

Title plays a crucial role in real estate transactions as it ensures the lawful transfer of ownership. A marketable title is one that is clear, demonstrating that you are the rightful owner without any title defects such as liens or encumbrances. Ensuring a marketable title is necessary before completing a property transaction to prevent future legal disputes.

Title Search and Insurance

• Title Search: Before you can secure title insurance, a title search is conducted. This process reviews the chain of title— the history of the property’s ownership. The purpose is to ascertain that the title is free from defects, and this search typically examines public records spanning many years.
• Title Insurance: Once the title search is completed, title insurance can be obtained to protect your investment. This insurance guards you against potential losses due to undiscovered defects in the title. It assures that your right to the property is safeguarded against claims that may arise after the purchase.

Your understanding of these components is vital for protecting your interests in real estate transactions within Pennsylvania.

The Deed Transfer Process

When transferring a property title in Pennsylvania, you will encounter different deed types and necessary steps that require attention to detail. The process includes preparing the deed, obtaining the necessary signatures, and fulfilling legal requirements to ensure a valid transfer.

Types of Deeds in Pennsylvania

In Pennsylvania, you’ll find three primary types of deeds:

• Warranty Deed: Offers the highest level of buyer protection, guaranteeing that the property is free from all liens and encumbrances.
• Special Warranty Deed: Provides assurances that the seller has not encumbered the property during their ownership but does not cover any issues before that time.
• Quitclaim Deed: Carries no warranties, meaning it transfers only the interest the seller has in the property, if any, without guarantees of clear title.

Preparing the Deed for Transfer

To properly prepare the deed for transfer, you must ensure it includes a legal description of the property and the current owner’s (the grantor’s) information:

• Obtain the most recent deed to the property.
• Draft a new deed that outlines the transfer from the current owner to the new owner (the grantee).
• Full names and addresses of both the grantor and grantee
• Complete legal description of the property
• Clause stating the type of deed: warranty, special warranty, or quitclaim

Role of Notary and Witnesses

The Commonwealth of Pennsylvania requires the signature of the grantor on the deed to be notarized. The presence of a notary ensures that the signature is authentic:

• The grantor signs the deed in front of the notary.
• The notary public verifies the identity of the signees and attaches their seal to the notarized document as a witness.
• While Pennsylvania does not statutorily require additional witnesses, it’s advisable to check if specific county regulations call for witnesses beyond the notary public.

Legal and Financial Considerations

When transferring property title in Pennsylvania, you need to be aware of various financial obligations and legal stipulations that may affect the process. This includes understanding the costs associated with transfer taxes and fees, ensuring there are no liens or encumbrances on the property, and considering how estate planning could influence inheritance.

Transfer Taxes and Fees

You are responsible for certain taxes and fees when you transfer a property title. Transfer tax is a key expense, which is a percentage of the property’s sale price. In Pennsylvania, this tax typically includes a state and local component, often totaling 2% of the sale price, although this can vary by location.

• State Transfer Tax: 1%
• Local Transfer Tax: 1% (may vary)

Recording fees are charged by the county to officially record the new deed. These fees vary but generally range from $50 to $150. Ensure these costs are factored into your budget when planning for the transfer.

Understanding Liens and Encumbrances

It’s crucial to identify any liens or encumbrances that may exist on the property before transfer. Liens, such as a mortgage or unpaid taxes, need to be cleared, or they become the responsibility of the new owner. Review the property’s title history thoroughly to avoid future legal complications.

Estate Planning and Inheritance Implications

If you’re transferring property as a result of estate planning or inheritance, it’s advisable to consult an estate attorney. Whether there’s a will or trust involved, these documents dictate the distribution of assets after death. If the property owner has passed away, the estate will undergo probate, a legal process to validate the will and oversee the distribution of assets, which may include the property in question. Understanding how these laws affect you can save time and prevent disputes during the title transfer process.

Transferring a property title in Pennsylvania is a detailed legal process that requires careful attention to statutory requirements and accuracy in documentation. To summarize the steps:

• Ensure Validity: Verify that the deed reflects the true intent of the parties involved and is duly signed.
• Tax Payments: Settle any applicable transfer taxes to avoid future legal complications.
• Proper Recording: File the signed deed with the county recorder of deeds to publicly acknowledge the change in ownership.

It’s imperative to record your deed promptly after the transaction to protect your rights as the new property owner. By doing so, any future claims or disputes involving the property can reference your recorded deed as the point of legal ownership transfer.

Remember, the local jurisdiction may have specific nuances in real estate law. Thus, consulting with a professional such as a real estate attorney or a title company can provide guidance and peace of mind throughout this process.

When you follow these steps thoroughly, you help ensure a secure and legally recognized transfer of property ownership.

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• How to Foreclose Your Loan Against Property Quickly?

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Tips to repay loan against property efficiently, advantages of foreclosing a loan against property, key points to remember while repaying loan against property, to conclude.

Repaying or foreclosing your Loan Against Property quickly is a smart move. It not only saves money on interest but also improves your financial health. This blog discusses strategies and tips to repay or foreclose your Loan Against Property quickly. Read on! 

Here are the 4 best strategies to repay or foreclose your Loan Against Property quickly:

1. Prepare a Budget and Commit to It Consistently

Prepare a budget by assessing several factors such as your income, expenditures, and liabilities. Manage your monthly outgo by reducing expenses but not compromising on the necessary expenditures.  A good financial habit will help you save more, which can be used towards repaying your loan.

2. Get a Loan Against Property Balance Transfer

You can also transfer your Loan Against Property to a new lender offering lower interest rates and better loan terms. By availing a balance transfer, you can not only save on your interest payments but also benefit from other perks like low part payment or foreclosure charges.

3. Boost Your Monthly EMI

You can quickly clear your debt by increasing your EMI amount. Use a Loan Against Property EMI calculator and calculate the new EMI amount depending on your desired loan tenure. You may also make a lump-sum prepayment from your surplus funds to reduce the outstanding interest and clear off your burden. 

4. Aim for a Down Payment Ranging from 20% to 30%

It is always recommended to aim for 20% to 30% down payments to get favourable terms. It can benefit you in the longer term by reducing the principal component which as a result will also reduce the interest. This will not only result in lower EMIs but also help you in shortening the loan tenure.

There are several benefits of foreclosing your Loan Against Property:

• You Can Save on the Interest

Foreclosing or prepaying a Loan Against Property can help you save a large amount on the entire interest payment. This enables long-term savings and gets rid of debt burden at the earliest.

• Helps Minimise Financial Risks

By foreclosing your loan, you can minimise your financial risk to a large extent. There can be economic turmoil in the future such as interest rate hikes and any other sudden changes which might affect your loan repayment capabilities

• Improves Your Credit Score

Making prepayments improves your creditworthiness as it reflects efficient debt management and financial planning. Hence an improved credit score can help you to avail loans at lower interest rates in the future.

However, please note that lending institutions levy certain fees on prepayment or foreclosure of loans. Hence it is always recommended to check the foreclosure charges on Loan Against Property at the time of availing it.

Also Read -  Decoding the concept of Loan Against Property (LAP)

Here are some important things to remember when paying back a Loan Against Property:

• You can set up reminders or automatic payments to ensure your EMI payments are on time to avoid extra fees and maintain a decent credit score.
• Preserve all your loan documents safely, such as loan agreements and any other payment records. These documents can act as proof that you're paying back your loan and can be useful in case of any problems or disputes.
• If you're having trouble paying back the loan, consider connecting with your lender regarding the issue. They might have ways to help, like loan restructuring, or changing your payment plan temporarily.

Also Read -  Loan Against Property Vs Personal Loan

Prepaying or foreclosing your Loan Against Property helps you save on the total interest payments, improves your credit score and reduces all other external risks which can affect your repayment capability. Following strategies like sticking to a budget, considering refinancing options, increasing your payments, and making a significant down payment can help you become debt-free.   

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan Against Property disbursal is at the sole discretion of Poonawalla Fincorp. *Terms and Conditions apply

Poonawalla Fincorp Team

Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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What is LTV in the case of LAP? How is it determined?

A loan against property or LAP can be an excellent alternative to a personal loan. It can help you access finances in the hour of need and meet your various financial requirements.

Life is uncertain and, people have responsibilities. Whether you are planning a wedding for a loved one, paying for the education of your child, engaged in home renovation, or dreaming of expand your business, you need readily available funds.

Advantages of Loan Against Property

A Loan against property is a secured loan granted when you offer your existing residential or commercial property as collateral.

Whenever we face a financial emergency, the first thing that comes to our mind is applying for a loan. By taking a loan from a lender, we can access urgent finances and meet our requirements.

Availing A Loan Against Property? Check the Probable Mistakes You Need to Avoid

Dont jump the gun, remains the wise phrase which needs to be kept in mind while availing a loan against property (LAP).

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Debt consolidation or debt settlement — what should you choose, debt consolidation and debt settlement may sound similar, but they're very different solutions..

Credit card debt can be a tough problem to solve. And when you're researching solutions, you may come across certain ones that sound vaguely similar. Debt settlement and debt consolidation might be easy to mix up, but they both offer very different approaches to tackling debt.

CNBC Select explains how debt consolidation and settlement work, how to choose which is right for you and what other solutions to consider.

Debt consolidation vs debt settlement

What is debt consolidation, what is debt settlement, is debt consolidation or settlement right for you, other solutions to consider, bottom line.

Debt consolidation is a method of debt repayment that involves combining multiple debts into one. This allows you to have a single monthly payment which can make it easier to stay on top of your bills. Plus, in the ideal scenario, you can save on interest payments.

There are a couple of tools you can use for debt consolidation. A balance transfer card , for instance, lets you move balances from other credit cards and avoid paying interest on the new combined balance for a specified amount of time. For example, the Wells Fargo Reflect® Card gives you a 0% APR on balance transfers and qualifying purchases for 21 months from account opening (18.24%, 24.74% or 29.99% variable APR thereafter). Note that with such cards, you'll need to pay a balance transfer fee on each transferred amount — the Wells Fargo Reflect, for instance, charges a 5% fee or $5 minimum.

Wells Fargo Reflect® Card

Welcome bonus.

0% intro APR for 21 months from account opening on purchases and qualifying balance transfers.

Regular APR

18.24%, 24.74%, or 29.99% Variable APR on purchases and balance transfers

Balance transfer fee

5%, min: $5

Foreign transaction fee

Credit needed.

Excellent/Good

See rates and fees . Terms apply.

A debt consolidation loan can also make your debts easier to manage. It's a personal loan designed for combining two or more unsecured debts. If you're approved for one, the lender will offer you an amount required to cover the debts. Many lenders even pay off your creditors directly. After that, you'll have a single fixed monthly payment with a fixed interest rate. Paying in installments makes for a predictable repayment schedule. And if your new APR is lower than what you've been paying before, you can also save on interest charges.

If your credit is in good shape, you're more likely to qualify for the lowest rates. CNBC Select recommends LightStream for borrowers with good or excellent credit. You can get same-day funding and there are no origination, early payoff or late fees.

LightStream Personal Loans

Annual percentage rate (apr).

7.49% - 25.99%* APR with AutoPay

Loan purpose

Debt consolidation, home improvement, auto financing, medical expenses, and others

Loan amounts

$5,000 to $100,000

24 to 144 months* dependent on loan purpose

Origination fee

Early payoff penalty.

Terms apply. *AutoPay discount is only available prior to loan funding. Rates without AutoPay are 0.50% points higher. Excellent credit required for lowest rate. Rates vary by loan purpose.

And if your credit leaves a lot to be desired, Upstart can be a great option since it works with borrowers with a minimum score of 300 and even those with insufficient credit history.

Upstart Personal Loans

7.8% - 35.99%

Debt consolidation, credit card refinancing, wedding, moving or medical

$1,000 to $50,000

36 and 60 months

FICO or Vantage score of 600 (but will accept applicants whose credit history is so insufficient they don't have a credit score)

0% to 12% of the target amount

The greater of 5% of monthly past due amount or $15

Terms apply.

Debt settlement (or debt relief) is the process of negotiating with your creditors to convince them to forgive a portion of your debt. You can choose to do it yourself or work with a debt settlement company that will negotiate on your behalf.

While the idea might sound appealing, debt relief is a risky endeavor. During this process, you stop making any payments toward your debt. Instead, you put your monthly payments in a savings account until you have enough to pay the sum that your debt settlement company and creditors agree on. However, while you're not paying, your creditors are likely to continue charging interest and late fees and report missed payments to credit bureaus . As a result, your credit score will potentially suffer long-lasting damage.

To add to that, there's no guarantee your settlement efforts will be fruitful. No company can promise you they'll be able to reach an agreement with your creditors, and if they tell you otherwise, it's most likely a scam . If you do go this route, it's crucial to watch out for fraudsters and work with a reputable provider. CNBC Select picked New Era Debt Solutions as the best overall debt relief company — it's been in business for over 20 years and has high rankings for customer service.

New Era Debt Solutions

14% to 23% of enrolled original debt

New Era Debt Solutions has slightly lower fees than some of the other debt relief services we rated. It's been in business for 22 years, and is rated 4.93 out of 5 for customer satisfaction through the Better Business Bureau.

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For most people, debt consolidation is the better choice. When comparing the two options, here's what to consider:

• With debt consolidation, you'll pay less in fees. Balance transfer cards typically charge a balance transfer fee of 3% to 5%. Some debt consolidation loans come with origination fees which can be up to 8%. But if you're working with a debt settlement company, you can expect to pay between 14% and 25% of the total debt you enroll.
• Debt settlement can harm your credit significantly. While negotiation is ongoing, you won't be paying your debts. All the missed payments will appear on your credit reports where they will remain for seven years. Payment history is the most crucial credit score factor , so multiple late payments might very well tank your credit. And even if the negotiation is successful, the credit bureaus will mark the accounts as settled, but with less than the full amount paid — which is still a negative entry on your report.
• Debt consolidation, on the other hand, can improve your scores. You might experience an initial small drop due to getting a new credit card or loan, but as you keep paying off the balance, you'll likely see positive changes. This is because you're improving your credit utilization ratio , another important credit score factor.
• You'll owe taxes on the forgiven debt. Most debt over $600 that's forgiven is considered taxable income and you'll need to report it on your annual taxes.
• Debt consolidation allows you to continue using your accounts once you pay them off. That's not the case with debt settlement since the lender will close the settled accounts.

Of course, that doesn't mean debt consolidation is always an ideal solution. Balance transfer credit cards often require good or excellent credit (or a FICO score of 680 or higher), so having a score on the lower end might result in a denied application. Some lenders offer debt consolidation loans for bad credit but will probably charge a high interest rate. And most importantly, debt consolidation requires discipline and patience. If you don't stick with the plan and instead keep adding to your debt, you risk finding yourself in an even worse situation.

Remember that there are multiple paths to debt repayment — you just have to find one that makes sense for you.

Often, all it takes is patience and dedication to the goal. You don't necessarily need any extra tools but you need a method. Whether you choose to focus on higher-interest debts or lower balances first, you can eliminate your debt on your own if you're consistent.

If you think you're past the point where you can figure out your debt yourself, you don't have to suffer alone. For instance, you can connect with a non-profit credit counseling agency where a certified counselor can analyze your financial situation. Your counselor may offer recommendations such as enrolling in a debt management program where the agency will create a payment plan with your creditors on your behalf.

Finally, there are legal tools, too. If you're drowning in debt and see no way out for years to come, bankruptcy is an option. Depending on the type, it can remove a certain amount of unsecured debt or get you into a repayment plan with better terms. Always consult with a credit counselor or bankruptcy attorney to determine whether it's the best approach for you.

Money matters — so make the most of it. Get expert tips, strategies, news and everything else you need to maximize your money, right to your inbox.  Sign up here .

Debt consolidation and debt settlement are two very different solutions to the same problem. Carefully analyze your situation to make the right choice and make sure to consider any additional options. Whatever you decide, discipline will be key to success. After all, it's hard to eliminate debt if you keep adding to it.

Why trust CNBC Select?

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every credit guide is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of credit products . While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics. See our methodology for more information on how we choose the best credit products.

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Nonbusiness credit card debt cancellation.

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Introduction

This publication explains the federal tax treatment of canceled debts, foreclosures, repossessions, and abandonments.

Generally, if you owe a debt to someone else and they cancel or forgive that debt for less than its full amount, you are treated for income tax purposes as having income and may have to pay tax on this income.

This publication generally refers to debt that is canceled, forgiven, or discharged for less than the full amount of the debt as “canceled debt.”

Sometimes a debt, or part of a debt, that you don't have to pay isn't considered canceled debt. These exceptions are discussed later under Exceptions .

Sometimes a canceled debt may be excluded from your income. But if you do exclude canceled debt from income, you may be required to reduce your “tax attributes.” These exclusions and the reduction of tax attributes associated with them are discussed later under Exclusions .

Foreclosure and repossession are remedies that your lender may exercise if you fail to make payments on your loan and you have previously granted that lender a mortgage or other security interest in some of your property. These remedies allow the lender to seize or sell the property securing the loan. When your property is foreclosed upon or repossessed and sold, you are treated as having sold the property and you may recognize taxable gain. Whether you also recognize income from canceled debt depends in part on whether you are personally liable for the debt and in part on whether the outstanding loan balance is more than the fair market value (FMV) of the property. Figuring your gain or loss and income from canceled debt arising from a foreclosure or repossession is discussed later under Foreclosures and Repossessions .

Generally, you abandon property when you voluntarily and permanently give up possession and use of property you own with the intention of ending your ownership but without passing it on to anyone else. Figuring your gain or loss and income from canceled debt arising from an abandonment is discussed later under Abandonments .

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225 Farmer's Tax Guide

334 Tax Guide for Small Business (For Individuals Who Use Schedule C)

523 Selling Your Home

525 Taxable and Nontaxable Income

536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts

542 Corporations

544 Sales and Other Dispositions of Assets

551 Basis of Assets

908 Bankruptcy Tax Guide

Form (and Instructions)

982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)

1099-C Cancellation of Debt

1099-DIV Dividends and Distributions

3800 General Business Credit

Common Situations Covered in This Publication

The sections of this publication that apply to you depend on the type of debt canceled, the tax attributes you have, and whether or not you continue to own the property that was subject to the debt. Some examples of common circumstances are provided in the following paragraphs to help guide you through this publication. These examples don't cover every situation but are intended to provide general guidance for the most common situations.

If you had a nonbusiness credit card debt canceled, you may be able to exclude the canceled debt from income if the cancellation occurred in a title 11 bankruptcy case or you were insolvent immediately before the cancellation. You should also read Bankruptcy or Insolvency under Exclusions in chapter 1 to see if you can exclude the canceled debt from income under one of those provisions. If you can exclude part or all of the canceled debt from income, you should also read Bankruptcy and Insolvency under Reduction of Tax Attributes in chapter 1.

If you had a personal vehicle repossessed and disposed of by the lender during the year, you will need to determine your gain or nondeductible loss on the disposition. This is explained in chapter 2 . If the lender also canceled all or part of the remaining amount of the loan, you may be able to exclude the canceled debt from income if the cancellation occurred in a title 11 bankruptcy case or you were insolvent immediately before the cancellation. You should read Bankruptcy or Insolvency under Exclusions in chapter 1 to see if you can exclude the canceled debt from income under one of those provisions. If you can exclude part or all of the canceled debt from income, you should also read Bankruptcy and Insolvency under Reduction of Tax Attributes in chapter 1.

If a lender foreclosed on your main home during the year, you will need to determine your gain or loss on the foreclosure. Foreclosures are explained in chapter 2 and abandonments are explained in chapter 3 .

If a lender agreed to a mortgage loan modification (a “workout”) in 2022 that included a reduction in the principal balance of the loan in 2023, you should read Qualified Principal Residence Indebtedness under Exclusions in chapter 1 to see if you can exclude part or all of the canceled debt from income. If you can exclude part or all of the canceled debt from income, you should also read Qualified Principal Residence Indebtedness under Reduction of Tax Attributes in chapter 1.

1. Canceled Debts

This chapter discusses the tax treatment of canceled debts.

General Rules

Generally, if a debt for which you are personally liable is forgiven or discharged for less than the full amount owed, the debt is considered canceled in whatever amount it remained unpaid. There are exceptions to this rule, discussed under Exceptions , later. Generally, you must include the canceled debt in your income. However, you may be able to exclude the canceled debt. See Exclusions , later.

You owed your friend $1,000. Your friend agreed to accept and you paid $400 in satisfaction of the entire debt. You have canceled debt of $600.

You owed your friend.$1,000. You both agreed that you would provide your friend with services (instead of money) in full satisfaction of the debt. You don't have canceled debt. Instead, you have income from services.

A debt includes any indebtedness:

For which you are liable, or

Subject to which you hold property.

If you aren't personally liable for the debt, you don't have ordinary income from the cancellation of debt unless you retain the collateral and either:

The lender offers a discount for the early payment of the debt, or

The lender agrees to a loan modification that results in the reduction of the principal balance of the debt.

However, upon the disposition of the property securing a nonrecourse debt, the amount realized includes the entire unpaid amount of the debt, not just the FMV of the property. As a result, you may realize a gain or loss if the outstanding debt immediately before the disposition is more or less than your adjusted basis in the property. For more details on figuring your gain or loss, see chapter 2 of this publication or see Pub. 544.

There are several exceptions and exclusions that may result in part or all of a canceled debt being nontaxable. See Exceptions and Exclusions , later. You must report any taxable canceled debt as ordinary income on:

Schedule 1 (Form 1040), line 8c, if the debt is a nonbusiness debt;

Schedule C (Form 1040), line 6, if the debt is related to a nonfarm sole proprietorship;

Schedule E (Form 1040), line 3, if the debt is related to nonfarm rental of real property;

Form 4835, line 6, if the debt is related to a farm rental activity for which you use Form 4835 to report farm rental income based on crops or livestock produced by a tenant; or

Schedule F (Form 1040), line 8, if the debt is farm debt and you are a farmer.

Form 1099-C

If you receive a Form 1099-C, that means an applicable entity has reported an identifiable event to the IRS regarding a debt you owe. For information on the reasons an applicable entity files Form 1099-C, see Identifiable event codes , later. Unless you meet one of the exceptions or exclusions discussed later, this canceled debt is ordinary income and must be reported on the appropriate form discussed above.

A financial institution.

A credit union.

Any of the following, its successor, or subunit of one of the following.

The Federal Deposit Insurance Corporation (FDIC).

The Resolution Trust Corporation (RTC).

The National Credit Union Administration (NCUA).

Any other federal executive agency, including government corporations, any military department, the U.S. Postal Service, or the Postal Rate Commission.

A corporate subsidiary of a financial institution or credit union (if the affiliation subjects the subsidiary to federal or state regulation).

A federal government agency, including a department, an agency, a court or court administrative office, or a judicial or legislative instrumentality.

Any organization of which lending money is a significant trade or business.

Box 6 of Form 1099-C should indicate the reason the creditor filed this form. The codes shown in box 6 are explained next. Also, see the chart after the explanation for a quick reference guide for the codes used in box 6.

Code A—Bankruptcy. Code A is used to identify cancellation of debt as a result of a title 11 bankruptcy case. See Bankruptcy , later.

Code B—Other judicial debt relief. Code B is used to identify cancellation of debt as a result of a receivership, foreclosure, or similar federal or state court proceeding other than bankruptcy.

Code C—Statute of limitations or expiration of deficiency period. Code C is used to identify cancellation of debt either when the statute of limitations for collecting the debt expires or when the statutory period for filing a claim or beginning a deficiency judgment proceeding expires. In the case of the expiration of a statute of limitations, an identifiable event occurs only if and when your affirmative defense of the statute of limitations is upheld in a final judgment or decision in a judicial proceeding, and the period for appealing the judgment or decision has expired.

Code D—Foreclosure election. Code D is used to identify cancellation of debt when the creditor elects foreclosure remedies that statutorily end or bar the creditor's right to pursue collection of the debt. This event applies to a mortgage lender or holder who is barred from pursuing debt collection after a power of sale in the mortgage or deed of trust is exercised.

Code E—Debt relief from probate or similar proceeding. Code E is used to identify cancellation of debt as a result of a probate court or similar legal proceeding.

Code F—By agreement. Code F is used to identify cancellation of debt as a result of an agreement between the creditor and the debtor to cancel the debt at less than full consideration.

Code G—Decision or policy to discontinue collection. Code G is used to identify cancellation of debt as a result of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. For purposes of this identifiable event, a defined policy includes both a written policy and the creditor's established business practice.

Code H—Other actual discharge before identifiable event. Code H is used to identify an actual cancellation of debt that occurs before any of the identifiable events described in codes A through G.

The amount in box 2 of Form 1099-C may represent some or all of the debt that has been canceled. The amount in box 2 will include principal and may include interest and other nonprincipal amounts (such as fees or penalties). Unless you meet one of the exceptions or exclusions discussed later, the amount of the debt that has been canceled is ordinary income and must be reported on the appropriate form, as discussed earlier.

If any interest is included in the amount of canceled debt in box 2, it will be shown in box 3. Whether the interest portion of the canceled debt must be included in your income depends on whether the interest would be deductible if you paid it. See Deductible Debt under Exceptions, later.

If you and another person were jointly and severally liable for a canceled debt, each of you may get a Form 1099-C showing the entire amount of the canceled debt. However, you may not have to report that entire amount as income. The amount, if any, you must report depends on all the facts and circumstances, including:

The amount of debt proceeds each person received,

How much of any interest deduction from the debt was claimed by each person,

How much of the basis of any co-owned property bought with the debt proceeds was allocated to each co-owner, and

Whether the canceled debt qualifies for any of the exceptions or exclusions described in this publication.

If a lender discounts (reduces) the principal balance of a loan because you pay it off early, or agrees to a loan modification (a “workout”) that includes a reduction in the principal balance of a loan, the amount of the discount or the amount of principal reduction is canceled debt. However, if the debt is nonrecourse and you didn't retain the collateral, you don't have cancellation of debt income. The amount of the canceled debt must be included in income unless one of the exceptions or exclusions described later applies. For more details, see Exceptions and Exclusions , later.

Sales or Other Dispositions (Such as Foreclosures and Repossessions)

If you owned property that was subject to a recourse debt in excess of the FMV of the property, the lender's foreclosure or repossession of the property is treated as a sale or disposition of the property by you and may result in your realization of gain or loss. The gain or loss on the disposition of the property is measured by the difference between the FMV of the property at the time of the disposition and your adjusted basis (usually your cost) in the property. The character of the gain or loss (such as ordinary or capital) is determined by the character of the property. If the lender forgives all or part of the amount of the debt in excess of the FMV of the property, the cancellation of the excess debt may result in ordinary income. The ordinary income from the cancellation of debt (the excess of the canceled debt over the FMV of the property) must be included in your gross income reported on your tax return unless one of the exceptions or exclusions described later applies. For more details, see Exceptions and Exclusions , later.

If you owned property that was subject to a nonrecourse debt in excess of the FMV of the property, the lender's foreclosure on the property doesn't result in ordinary income from the cancellation of debt. The entire amount of the nonrecourse debt is treated as an amount realized on the disposition of the property. The gain or loss on the disposition of the property is measured by the difference between the total amount realized (the entire amount of the nonrecourse debt plus the amount of cash and the FMV of any property received) and your adjusted basis in the property. The character of the gain or loss is determined by the character of the property.

See chapter 2 of this publication and Pubs. 523, 544, and 551 for more details.

Abandonments

If you abandon property that secures a debt for which you are personally liable (recourse debt) and the debt is canceled, you will realize ordinary income equal to the canceled debt. You must report this income on your tax return unless one of the exceptions or exclusions described later applies. For more details, see Exceptions and Exclusions , later. This income is separate from any amount realized from the abandonment of the property. For more details, see chapter 3 .

If you abandon property that secures a debt for which you aren't personally liable (nonrecourse debt), you may realize gain or loss but won't have cancellation of indebtedness income.

If you are a stockholder in a corporation and the corporation cancels or forgives your debt to it, the canceled debt is a constructive distribution. For more information, see Pub. 542.

There are several exceptions to the requirement that you include canceled debt in income. These exceptions apply before the exclusions discussed later and don't require you to reduce your tax attributes.

In most cases, you don't have income from canceled debt if the debt is canceled as a gift, bequest, devise, or inheritance.

Student Loans

Generally, if you are responsible for making loan payments, and the loan is canceled or repaid by someone else, you must include the amount that was canceled or paid on your behalf in your gross income for tax purposes. However, in certain circumstances, you may be able to exclude amounts from gross income as a result of the cancellation or repayment of certain student loans. These exclusions are for:

Student loan cancellation due to meeting certain work requirements;

Cancellation of certain loans after December 31, 2020, and before January 1, 2026; or

Student loan repayment assistance programs.

If your student loan is canceled in part or in whole in 2023 due to meeting certain work requirements, you may not have to include the canceled debt in your income. To qualify for this work-related exclusion, your loan must have been made by a qualified lender to assist you in attending an eligible educational organization described in section 170(b)(1)(A)(ii). In addition, the cancellation must be pursuant to a provision in the student loan that all or part of the debt will be canceled if you work:

For a certain period of time,

In certain professions, and

For any of a broad class of employers.

This is an educational organization that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.

These include the following.

The United States, or an instrumentality or agency thereof.

A state or territory of the United States; or the District of Columbia; or any political subdivision thereof.

A public benefit corporation that is tax-exempt under section 501(c)(3); and that has assumed control of a state, county, or municipal hospital; and whose employees are considered public employees under state law.

An educational organization described in section 170(b)(1)(A)(ii), if the loan is made:

As part of an agreement with an entity described in (1), (2), or (3) under which the funds to make the loan were provided to the educational organization; or

Under a program of the educational organization that is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs where services provided by the students (or former students) are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization.

The American Rescue Plan Act of 2021 modified the treatment of student loan forgiveness for discharges in 2021 through 2025. Generally, if you are responsible for making loan payments, and the loan is canceled or repaid by someone else, you must include the amount that was canceled or paid on your behalf in your gross income for tax purposes. However, in certain circumstances, you may be able to exclude this amount from gross income if the loan was one of the following.

A loan for postsecondary educational expenses.

A private education loan.

A loan from an educational organization described in section 170(b)(1)(A)(ii).

A loan from an organization exempt from tax under section 501(a) to refinance a student loan.

This is any loan provided expressly for postsecondary education, regardless of whether provided through the educational organization or directly to the borrower, if such loan was made, insured, or guaranteed by one of the following.

An eligible educational organization.

An eligible educational organization is generally any accredited public, nonprofit, or proprietary (privately owned profit-making) college, university, vocational school, or other postsecondary educational organization. Also, the organization must be eligible to participate in a student aid program administered by the U.S. Department of Education.

An eligible educational organization also includes certain educational organizations located outside the United States that are eligible to participate in a student aid program administered by the U.S. Department of Education.

A private education loan is a loan provided by a private educational lender that:

Is not made, insured, or guaranteed under Title IV of the Higher Education Act of 1965; and

Is issued expressly for postsecondary educational expenses to a borrower, regardless of whether the loan is provided through the educational organization that the student attends or directly to the borrower from the private educational lender. A private education loan does not include an extension of credit under an open end consumer credit plan, a reverse mortgage transaction, a residential mortgage transaction, or any other loan that is secured by real property or a dwelling.

A private educational lender is one of the following.

A financial institution that solicits, makes, or extends private education loans.

A federal credit union that solicits, makes, or extends private education loans.

Any other person engaged in the business of soliciting, making, or extending private education loans.

This is any loan made by the organization if the loan is made:

As part of an agreement with an entity described earlier under which the funds to make the loan were provided to the educational organization; or

Under a program of the educational organization that is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs where the services provided by the students (or former students) are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization.

This is any corporation, community chest, fund, or foundation organized and operated exclusively for one or more of the following purposes.

Charitable.

Educational.

Scientific.

Testing for public safety.

Fostering national or international amateur sports competition (but only if none of its activities involve providing athletic facilities or equipment).

The prevention of cruelty to children or animals.

In most cases, the cancellation of a student loan made by an educational organization because of services you performed for that organizationn or another organization that provided the funds for the loan must be included in gross income on your tax return.

If you refinanced a student loan with another loan from an eligible educational organization or a tax-exempt organization, that loan may also be considered as made by a qualified lender. The refinanced loan is considered made by a qualified lender if it’s made under a program of the refinancing organization that is designed to encourage students to serve in occupations with unmet needs or in areas with unmet needs where the services required of the students are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization.

Student loan repayments made to you are tax free if you received them for any of the following.

The National Health Service Corps (NHSC) Loan Repayment Program.

A state education loan repayment program eligible for funds under the Public Health Service Act.

Any other state loan repayment or loan forgiveness program that is intended to provide for the increased availability of health services in underserved or health professional shortage areas (as determined by such state).

If you use the cash method of accounting, you don't realize income from the cancellation of debt if the payment of the debt would have been a deductible expense. This exception applies before the price reduction exception discussed next.

In December 2022, you get accounting services for your farm on credit. In early 2023, you have trouble paying your farm debts and your accountant forgives part of the amount you owe for the accounting services. How you treat the canceled debt depends on your method of accounting.

Cash method. You don't include the canceled debt in income because payment of the debt would have been deductible as a business expense in 2023.

Accrual method. Unless another exception or exclusion applies, you must include the canceled debt in ordinary income because the expense was deductible in 2022 when you incurred the debt.

If debt you owe the seller for the purchase of property is reduced by the seller at a time when you aren't insolvent and the reduction doesn't occur in a title 11 bankruptcy case, the reduction doesn't result in cancellation of debt income. However, you must reduce your basis in the property by the amount of the reduction of your debt to the seller. The rules that apply to bankruptcy and insolvency are explained in Exclusions next.

After you have applied any exceptions to the general rule that a canceled debt is included in your income, there are several reasons why you might still be able to exclude a canceled debt from your income. These exclusions are explained next. If a canceled debt is excluded from your income, it is nontaxable. In most cases, however, if you exclude canceled debt from income under one of these provisions, you must also reduce your tax attributes (certain credits, losses, and basis of assets) as explained later under Reduction of Tax Attributes .

Debt canceled in a title 11 bankruptcy case isn't included in your income. A title 11 bankruptcy case is a case under title 11 of the United States Code (including all chapters in title 11 such as chapters 7, 11, and 13). You must be a debtor under the jurisdiction of the court and the cancellation of the debt must be granted by the court or occur as a result of a plan approved by the court.

You don’t qualify for the bankruptcy exclusion by being an owner of, or a partner in a partnership that owns, a grantor trust or disregarded entity that is a debtor in a title 11 bankruptcy case. You must be a debtor in a title 11 bankruptcy case to qualify for this exclusion.

To show that your debt was canceled in a bankruptcy case and is excluded from income, attach Form 982 to your federal income tax return and check the box on line 1a. Lines 1b through 1e don't apply to a cancellation that occurs in a title 11 bankruptcy case. Enter the total amount of debt canceled in your title 11 bankruptcy case on line 2. You must also reduce your tax attributes in Part II of Form 982, as explained under Reduction of Tax Attributes , later.

Don't include a canceled debt in income to the extent that you were insolvent immediately before the cancellation. You don’t qualify for the insolvency exclusion by being an owner of, or a partner in a partnership that owns, a grantor trust or disregarded entity that is insolvent. You must be insolvent to qualify for this exclusion. You were insolvent immediately before the cancellation to the extent that the total of all of your liabilities was more than the FMV of all of your assets immediately before the cancellation. For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets, which are beyond the reach of your creditors under the law, such as your interest in a pension plan and the value of your retirement account). Liabilities include:

The entire amount of recourse debt;

The amount of nonrecourse debt that isn't in excess of the FMV of the property that is security for the debt; and

The amount of nonrecourse debt in excess of the FMV of the property subject to the nonrecourse debt, to the extent nonrecourse debt in excess of the FMV of the property subject to the debt is forgiven.

This exclusion doesn't apply to a cancellation of debt that occurs in a title 11 bankruptcy case. It also doesn't apply if the debt is qualified principal residence indebtedness (defined in this section under Qualified Principal Residence Indebtedness , later) unless you elect to apply the insolvency exclusion instead of the qualified principal residence indebtedness exclusion.

To show that you are excluding canceled debt from income under the insolvency exclusion, attach Form 982 to your federal income tax return and check the box on line 1b. On line 2, include the smaller of the amount of the debt canceled or the amount by which you were insolvent immediately before the cancellation. You can use the Insolvency Worksheet to help calculate the extent that you were insolvent immediately before the cancellation. You must also reduce your tax attributes in Part II of Form 982, as explained under Reduction of Tax Attributes , later.

Example 1—amount of insolvency more than canceled debt.

In 2023, you were released from an obligation to pay a personal credit card debt in the amount of $5,000. You received a 2023 Form 1099-C from the credit card lender showing the entire amount of discharged debt of $5,000 in box 2. None of the exceptions to the general rule that canceled debt is included in income apply. You use the Insolvency Worksheet to determine that the total liabilities immediately before the cancellation were $15,000 and the FMV of the total assets immediately before the cancellation was $7,000. This means that immediately before the cancellation, you were insolvent to the extent of $8,000 ($15,000 total liabilities minus $7,000 FMV of the total assets). Because the amount by which you were insolvent immediately before the cancellation was more than the amount of debt canceled, you can exclude the entire $5,000 canceled debt from income.

When completing the tax return, you check the box on line 1b of Form 982 and enter $5,000 on line 2. You complete Part II to reduce the tax attributes, as explained under Reduction of Tax Attributes , later. You don’t include any of the $5,000 canceled debt on Schedule 1 (Form 1040), line 8c. None of the canceled debt is included in income.

Example 2—amount of insolvency less than canceled debt.

The facts are the same as in Example 1 , except that your total liabilities immediately before the cancellation were $10,000 and the FMV of the total assets immediately before the cancellation was $7,000. In this case, you are insolvent to the extent of $3,000 ($10,000 total liabilities minus $7,000 FMV of the total assets) immediately before the cancellation. Because the amount of the canceled debt was more than the amount by which you were insolvent immediately before the cancellation, you can exclude only $3,000 of the $5,000 canceled debt from income under the insolvency exclusion.

You check the box on line 1b of Form 982 and include $3,000 on line 2. Also, you complete Part II to reduce the tax attributes, as explained under Reduction of Tax Attributes , later. Additionally, you must include $2,000 of canceled debt on Schedule 1 (Form 1040), line 8c (unless another exclusion applies).

Example 3—joint debt and separate returns.

In 2023, you and your spouse were released from an obligation to pay a debt of $10,000 for which you were jointly and severally liable. None of the exceptions to the general rule that canceled debt is included in income apply. The debt (originally $12,000) was incurred to finance your purchase of a $9,000 motorcycle and your spouse's purchase of a laptop computer and software for personal use for $3,000. You each received a 2023 Form 1099-C from the bank showing the entire canceled debt of $10,000 in box 2. Based on the use of the loan proceeds, you both agreed that you were responsible for 75% of the debt and your spouse was responsible for the remaining 25%. Therefore, your share of the debt is $7,500 (75% of $10,000) and your spouse’s share is $2,500 (25% of $10,000). By completing the Insolvency Worksheet , you determine that, immediately before the cancellation of the debt, you were insolvent to the extent of $5,000 ($15,000 total liabilities minus $10,000 FMV of the total assets). You can exclude $5,000 of the $7,500 canceled debt. Your spouse completes a separate Insolvency Worksheet and determines your spouse was insolvent to the extent of $4,000 ($9,000 total liabilities minus $5,000 FMV of the total assets). Your spouse can exclude the entire canceled debt of $2,500.

When completing the separate tax return, you check the box on line 1b of Form 982 and enter $5,000 on line 2. You complete Part II to reduce the tax attributes, as explained under Reduction of Tax Attributes , later. You must include the remaining $2,500 (your $7,500 share of the canceled debt minus the $5,000 extent to which you were insolvent) of canceled debt on Schedule 1 (Form 1040), line 8c (unless another exclusion applies).

When completing the return, your spouse checks the box on line 1b of Form 982 and enters $2,500 on line 2. Your spouse completes Part II to reduce the tax attributes, as explained under Reduction of Tax Attributes , later. Your spouse doesn’t include any of the canceled debt on Schedule 1 (Form 1040), line 8c. None of the canceled debt has to be included in income.

You can exclude canceled farm debt from income on your 2023 return if all of the following apply.

The debt was incurred directly in connection with your operation of the trade or business of farming.

50% or more of your total gross receipts for 2020, 2021, and 2022 were from the trade or business of farming.

The cancellation was made by a qualified person. A qualified person is an individual, organization, partnership, association, corporation, or other person who is actively and regularly engaged in the business of lending money. A qualified person also includes any federal, state, or local government or agency or instrumentality of one of those governments. For example, the U.S. Department of Agriculture is a qualified person. A qualified person can't be related to you, can't be the person from whom you acquired the property (or a person related to this person), and can't be a person who receives a fee due to your investment in the property (or a person related to this person).

This exclusion doesn't apply to a cancellation of debt in a title 11 bankruptcy case or to the extent you were insolvent immediately before the cancellation. If qualified farm debt is canceled in a title 11 case, you must apply the bankruptcy exclusion rather than the exclusion for canceled qualified farm debt. If you were insolvent immediately before the cancellation of qualified farm debt, you must apply the insolvency exclusion before applying the exclusion for canceled qualified farm debt.

The amount of canceled qualified farm debt you can exclude from income under this exclusion is limited. It can't be more than the sum of:

Your adjusted tax attributes, and

The total adjusted basis of qualified property you held at the beginning of 2024.

Any canceled qualified farm debt that is more than this limit must be included in your income.

For more information about the basis of property, see Pub. 551.

Adjusted tax attributes means the sum of the following items.

Any net operating loss (NOL) for 2023 and any NOL carryover to 2023.

Any net capital loss for 2023 and any capital loss carryover to 2023.

Any passive activity loss carryover from 2023.

Three times the sum of any:

General business credit carryover to or from 2023,

Minimum tax credit available as of the beginning of 2024,

Foreign tax credit carryover to or from 2023, and

Passive activity credit carryover from 2023.

This is any property you use or hold for use in your trade or business or for the production of income.

To show that all or part of your canceled debt is excluded from income because it is qualified farm debt, check the box on line 1c of Form 982 and attach it to your Form 1040 or 1040-SR. On line 2 of Form 982, include the amount of the qualified farm debt canceled, but not more than the exclusion limit (explained earlier). You must also reduce your tax attributes in Part II of Form 982, as explained under Reduction of Tax Attributes , later.

Example 1—only qualified farm indebtedness exclusion applies.

In 2023, you were released from an obligation to pay a $10,000 debt that was incurred directly in connection with the trade or business of farming. You received a Form 1099-C from the qualified lender showing discharged debt of $10,000 in box 2. For 2020, 2021, and 2022 tax years, at least 50% of your total gross receipts were from the trade or business of farming. Your adjusted tax attributes are $5,000 and you have $3,000 total adjusted basis in qualified property at the beginning of 2024. You had no other debt canceled during 2023 and no other exception or exclusion relating to canceled debt income applies.

You can exclude $8,000 ($5,000 of adjusted tax attributes plus $3,000 total adjusted basis in qualified property at the beginning of 2024) of the $10,000 canceled debt from income. You check the box on line 1c of Form 982 and enter $8,000 on line 2. Also, you complete Part II to reduce the tax attributes, as explained under Reduction of Tax Attributes , later. The remaining $2,000 of canceled qualified farm debt is included in your income on Schedule F (Form 1040), line 8.

Example 2—both insolvency and qualified farm indebtedness exclusions apply.

On March 2, 2023, you were released from an obligation to pay a $10,000 business credit card debt that was used directly in connection with a farming business. For 2020, 2021, and 2022 tax years, at least 50% of your total gross receipts were from the trade or business of farming. You received a 2023 Form 1099-C from the qualified lender showing discharged debt of $10,000 in box 2. The FMV of your total assets on March 2, 2023 (immediately before the cancellation of the credit card debt), was $7,000 and your total liabilities at that time were $11,000. Your adjusted tax attributes (a 2023 NOL) are $7,000 and you have $4,000 total adjusted basis in qualified property at the beginning of 2024.

You qualify to exclude $4,000 of the canceled debt under the insolvency exclusion because you are insolvent to the extent of $4,000 immediately before the cancellation ($11,000 total liabilities minus $7,000 FMV of total assets). You must reduce the tax attributes under the insolvency rules before applying the rules for qualified farm debt.

You also qualify to exclude the remaining $6,000 of canceled qualified farm debt. The limit on your exclusion from income of canceled qualified farm debt is $7,000, the sum of:

Your adjusted tax attributes of $3,000 (the $7,000 NOL minus the $4,000 reduction of tax attributes required because of the $4,000 exclusion of canceled debt under the insolvency exclusion), and

Your total adjusted basis of $4,000 in qualified property held at the beginning of 2024.

You check the boxes on lines 1b and 1c of Form 982 and enter $10,000 on line 2. You complete Part II to reduce the tax attributes, as explained under Reduction of Tax Attributes , later. You don’t include any of the canceled debt in income.

Example 3—no qualified farm indebtedness exclusion when insolvent to the extent of canceled debt.

The facts are the same as in Example 2 , except that immediately before the cancellation, you were insolvent to the extent of the full $10,000 canceled debt. Because the exclusion for qualified farm debt doesn't apply to the extent that your insolvency (immediately before the cancellation) was equal to the full amount of the canceled debt, you check only the box on line 1b of Form 982 and enter $10,000 on line 2. You complete Part II to reduce the tax attributes based on the insolvency exclusion, as explained under Reduction of Tax Attributes , later. You don’t include any of the canceled debt in income.

You can elect to exclude canceled qualified real property business indebtedness from income. Qualified real property business indebtedness is debt (other than qualified farm debt) that meets all of the following conditions.

It was incurred or assumed in connection with real property used in a trade or business. Real property used in a trade or business doesn’t include real property developed and held primarily for sale to customers in the ordinary course of business.

It is secured by that real property. As long as certain other requirements are met, indebtedness that is secured by 100% of the ownership interest in a disregarded entity holding real property will be treated as indebtedness that is secured by real property. For more information, and for the requirements that must be met, see Revenue Procedure 2014-20, available at IRS.gov/irb/2014-9_IRB#RP-2014-20 .

It was incurred or assumed:

Before 1993; or

After 1992, if the debt is either (i) qualified acquisition indebtedness (defined next), or (ii) debt incurred to refinance qualified real property business debt incurred or assumed before 1993 (but only to the extent the amount of such debt doesn't exceed the amount of debt being refinanced).

It is debt to which you elect to apply these rules.

Qualified acquisition indebtedness is:

Debt incurred or assumed to acquire, construct, reconstruct, or substantially improve real property that is used in a trade or business and secures the debt; or

Debt resulting from the refinancing of qualified acquisition indebtedness, to the extent the amount of the debt doesn't exceed the amount of debt being refinanced.

This exclusion doesn't apply to a cancellation of debt in a title 11 bankruptcy case or to the extent you were insolvent immediately before the cancellation. If qualified real property business debt is canceled in a title 11 bankruptcy case, you must apply the bankruptcy exclusion rather than the exclusion for canceled qualified real property business debt. If you were insolvent immediately before the cancellation of qualified real property business debt, you must apply the insolvency exclusion before applying the exclusion for canceled qualified real property business debt.

The amount of canceled qualified real property business debt you can exclude from income under this exclusion has two limits. The amount you can exclude can't be more than either:

The excess (if any) of the outstanding principal amount of the qualified real property business debt (immediately before the cancellation) over the FMV (immediately before the cancellation) of the business real property securing the debt, or

The total adjusted basis of depreciable real property you held immediately before the cancellation of the qualified real property business debt (other than depreciable real property acquired in contemplation of the cancellation).

When figuring the first limit in (1) above, reduce the FMV of the business real property securing the debt (immediately before the cancellation) by the outstanding principal amount of any other qualified real property business debt secured by that property (immediately before the cancellation). When figuring the second (overall) limit in (2) above, use the adjusted basis of the depreciable real property after any reductions in basis required because of the exclusion of debt canceled under the bankruptcy, insolvency, or farm debt provisions described in this publication or because of other basis adjustments that may apply to that depreciable property.

You must make an election to exclude canceled qualified real property business debt from gross income. The election must be made on a timely filed federal income tax return (including extensions) for 2023 and can be revoked only with IRS consent. The election is made by completing Form 982 in accordance with its instructions. Attach Form 982 to your federal income tax return for 2023 and check the box on line 1d. Include the amount of canceled qualified real property business debt (but not more than the amount of the exclusion limit, explained earlier) on line 2 of Form 982. You must also reduce your tax attributes in Part II of Form 982, as explained under Reduction of Tax Attributes , later.

If you timely filed your tax return without making this election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Enter “Filed pursuant to section 301.9100-2” on the amended return and file it at the same place you filed the original return.

Example—full qualified real property business indebtedness exclusion.

In 2017, you bought a retail store for use in a business that you operated as a sole proprietorship. You made a $20,000 down payment and financed the remaining $200,000 of the purchase price with a bank loan. The bank loan was a recourse loan and was secured by the property. You used the property in the business continuously since it was purchased. You had no other debt secured by that depreciable real property. In addition to the retail store, you owned depreciable equipment and furniture with an adjusted basis of $50,000.

Your business encountered financial difficulties in 2023. On September 21, 2023, the bank financing the retail store loan entered into a workout agreement with you under which it canceled $20,000 of the debt. Immediately before the cancellation, the outstanding principal balance on the retail store loan was $185,000, the FMV of the store was $165,000, and the adjusted basis was $210,000 ($220,000 cost minus $10,000 accumulated depreciation).

The bank sent you a 2023 Form 1099-C showing discharged debt of $20,000 in box 2. You had no tax attributes other than the basis to reduce and you didn’t qualify for any exception or exclusion other than the qualified real property business debt exclusion.

You elect to apply the qualified real property business debt exclusion to the canceled debt. The amount of canceled qualified real property business debt that you can exclude from income is limited. The amount you can exclude can’t be more than either:

$20,000 (the excess of the $185,000 outstanding principal amount of your qualified real property business debt immediately before the cancellation over the $165,000 FMV of the business real property securing the debt), or

$210,000 (the total adjusted basis of the depreciable real property you held immediately before the cancellation).

Thus, you can exclude the entire $20,000 of canceled qualified real property business debt from income. You check the box on line 1d of Form 982 and enter $20,000 on line 2. You must also use line 4 of Form 982 to reduce the basis in depreciable real property by the $20,000 of canceled qualified real property business debt excluded from income, as explained under Reduction of Tax Attributes , later.

Qualified principal residence indebtedness is any mortgage you took out to buy, build, or substantially improve your main home. It must also be secured by your main home. Qualified principal residence indebtedness also includes any debt secured by your main home that you used to refinance a mortgage you took out to buy, build, or substantially improve your main home, but only up to the amount of the old mortgage principal just before the refinancing.

Example 1—qualified principal residence indebtedness amount after refinance.

In 2022, you bought a main home for $315,000. You took out a $300,000 mortgage loan to buy the home and made a down payment of $15,000. The loan was secured by the home. Later that year, you took out a second mortgage loan in the amount of $50,000 that was used to add a garage to the home.

In 2023, when the outstanding principal of the first and second mortgage loans was $325,000, you refinanced the two loans into one loan in the amount of $400,000. The FMV of the home at the time of the refinancing was $430,000. You used the additional $75,000 debt proceeds ($400,000 new mortgage loan minus $325,000 outstanding principal balances of the first and second mortgage loans immediately before the refinancing) to pay off personal credit cards and to pay college tuition for your daughter.

After the refinancing, your qualified principal residence indebtedness is $325,000 because the $400,000 debt resulting from the refinancing is qualified principal residence indebtedness only to the extent it isn't more than the old mortgage principal just before the refinancing (the $325,000 of outstanding principal on your first and second mortgages, which both qualified as principal residence indebtedness).

Example 2—refinancing home equity loan used for other purposes.

In 2022, you acquired a main home for $200,000, subject to a mortgage of $175,000. Later that year, you took out a home equity loan for $10,000, secured by the main home, which you used to pay off personal credit cards.

In 2023, when the outstanding principal on the mortgage was $170,000, and the outstanding principal on the home equity loan was $9,000, you refinanced the two loans into one loan in the amount of $200,000. The FMV of the home at the time of refinancing was $210,000. You used the additional $21,000 ($200,000 new mortgage loan minus $179,000 outstanding principal balances on the mortgage and home equity loan) to cover medical expenses.

After refinancing, your qualified principal residence indebtedness is $170,000 because the debt resulting from the refinancing is qualified principal residence indebtedness only to the extent it refinances debt that had been secured by the main home and was used to buy, build, or substantially improve the main home.

Your main home is the one in which you live most of the time. You can have only one main home at any one time.

This exclusion doesn't apply to a cancellation of debt in a title 11 bankruptcy case. If qualified principal residence indebtedness is canceled in a title 11 bankruptcy case, you must apply the bankruptcy exclusion rather than the exclusion for qualified principal residence indebtedness. If you were insolvent immediately before the cancellation, you can elect to apply the insolvency exclusion (as explained under Insolvency , earlier) instead of applying the qualified principal residence indebtedness exclusion. To do this, check the box on line 1b of Form 982 instead of the box on line 1e.

The maximum amount you can treat as qualified principal residence indebtedness is $750,000 ($375,000 if married filing separately). You can't exclude canceled qualified principal residence indebtedness from income if the cancellation was for services performed for the lender or on account of any other factor not directly related to a decline in the value of your home or to your financial condition.

If only a part of a loan is qualified principal residence indebtedness, the exclusion applies only to the extent the amount canceled is more than the amount of the loan (immediately before the cancellation) that isn’t qualified principal residence indebtedness. The remaining part of the loan may qualify for another exclusion.

Example 3—ordering rule on cancellation of nonqualified principal residence debt.

You incurred recourse debt of $800,000 when you bought a main home for $880,000. When the FMV of the property was $1 million, you refinanced the debt for $850,000. At the time of the refinancing, the principal balance of the original mortgage loan was $740,000. You used the $110,000 obtained from the refinancing ($850,000 minus $740,000) to pay off credit cards and to buy a new car.

About 2 years after the refinancing, you lost your job and were unable to get another job paying a comparable salary. Your home had declined in value to between $600,000 and $650,000. Based on your circumstances, the lender agreed to allow a short sale of the property for $620,000 and to cancel the remaining $115,000 of the outstanding $735,000 debt. Under the ordering rule, you can exclude only $5,000 of the canceled debt from income under the exclusion for canceled qualified principal residence indebtedness ($115,000 canceled debt minus the $110,000 amount of the debt that wasn't qualified principal residence indebtedness). You must include the remaining $110,000 of canceled debt in income on Schedule 1 (Form 1040), line 8c (unless another exclusion applies).

To show that all or part of your canceled debt is excluded from income because it is qualified principal residence indebtedness, attach Form 982 to your federal income tax return and check the box on line 1e. On line 2 of Form 982, include the amount of canceled qualified principal residence indebtedness, but not more than the amount of the exclusion limit (explained earlier). If you continue to own your home after a cancellation of qualified principal residence indebtedness, you must reduce your basis in the home, as explained under Reduction of Tax Attributes next.

Reduction of Tax Attributes

If you exclude canceled debt from income, you must reduce certain tax attributes (but not below zero) by the amount excluded. Use Part II of Form 982 to reduce your tax attributes. The order in which the tax attributes are reduced depends on the reason the canceled debt was excluded from income. If the total amount of canceled debt excluded from income (line 2 of Form 982) was more than your total tax attributes, the total reduction of tax attributes in Part II of Form 982 will be less than the amount on line 2.

If you exclude canceled qualified principal residence indebtedness from income and you continue to own the home after the cancellation, you must reduce the basis of the home (but not below zero) by the amount of the canceled qualified principal residence indebtedness excluded from income. Enter the amount of the basis reduction on line 10b of Form 982.

For more details on determining the basis of your main home, see Pub. 523.

Bankruptcy and Insolvency

If the canceled debt you are excluding isn't excluded as qualified principal residence indebtedness and you have no tax attributes other than the adjusted basis of personal-use property (see the list of seven tax attributes, later), you must reduce the basis of the personal-use property you held at the beginning of 2024 (in proportion to adjusted basis). Personal-use property is any property that isn't used in your trade or business or held for investment (such as your home, home furnishings, and car). Include on line 10a of Form 982 the smallest of:

The basis of your personal-use property held at the beginning of 2024,

The amount of canceled nonbusiness debt (other than qualified principal residence indebtedness) that you are excluding from income on line 2 of Form 982, or

The excess of the total basis of the property and the amount of money you held immediately after the cancellation over your total liabilities immediately after the cancellation.

In 2022, you bought a car for personal use. The cost of the car was $12,000. You put down $2,000 and took out a loan of $10,000 to buy the car. The loan was a recourse loan, meaning that you were personally liable for the full amount of the debt.

On December 7, 2023, when the balance of the loan was $8,500, the lender repossessed and sold the car because you stopped making payments on the loan. The FMV of the car was $7,000 at the time the lender repossessed and sold it. The lender applied the $7,000 it received on the sale of the car against your loan and forgave the remaining loan balance of $1,500 ($8,500 outstanding balance immediately before the repossession minus the $7,000 FMV of the car).

Your only other assets at the time of the cancellation are the furniture in your apartment, which has a basis of $5,000 and an FMV of $3,000; jewelry with a basis of $500 and an FMV of $1,000; and a $600 balance in a savings account. Thus, the FMV of your total assets immediately before the cancellation was $11,600 ($7,000 car plus $3,000 furniture plus $1,000 jewelry plus $600 savings). You also had an outstanding student loan balance of $6,000 immediately before the cancellation, bringing the total liabilities at that time to $14,500 ($8,500 balance on car loan plus $6,000 student loan balance). Other than the car, which was repossessed, you held all of these assets at the beginning of 2024. The FMV and basis of the assets remained the same at the beginning of 2024.

You received a 2023 Form 1099-C showing $1,500 in box 2 (amount of debt that was canceled) and $7,000 in box 7 (FMV of the property). You can exclude all $1,500 of canceled debt from income because at the time of the cancellation, you were insolvent to the extent of $2,900 ($14,500 of total liabilities immediately before the cancellation minus $11,600 FMV of total assets at that time).

You check box 1b on Form 982 and enter $1,500 on line 2. You enter $100 on line 10a, the smallest of:

The $5,500 basis of your personal-use property held at the beginning of 2024 ($5,000 furniture plus $500 jewelry),

The $1,500 nonbusiness debt you are excluding from income on line 2 of Form 982, or

The $100 excess of the total basis of the property and the amount of money you held immediately after the cancellation over the total liabilities at that time ($5,500 basis of property held immediately after the cancellation plus $600 savings minus $6,000 student loan).

You must reduce (by one dollar for each dollar of excluded canceled debt) the basis in each item of property held at the beginning of 2024 in proportion to the total adjusted basis in all the property. The total reduction, however, can't be more than (3) above—the $100 excess of the total adjusted basis and the money held after the cancellation over the total liabilities after the cancellation. See the basis attribute under All other tax attributes next.

Thus, you reduce the basis as follows.

The furniture's basis is 91% of the total adjusted basis ($5,000 divided by $5,500), so you reduce it by $91 (the $100 excess in (3) multiplied by 0.91).

The jewelry’s basis is 9% of the total adjusted basis ($500 divided by $5,500), so you reduce it by $9 (the $100 excess in (3) multiplied by 0.09).

If the canceled debt is excluded by reason of the bankruptcy or insolvency exclusion, you must use the excluded debt to reduce the following tax attributes (but not below zero) in the order listed unless you elect to reduce the basis of depreciable property first, as explained later. Reduce your tax attributes after you figure your income tax liability for 2023.

Net operating loss (NOL). First reduce any 2023 NOL and then reduce any NOL carryover to 2023 (after taking into account any amount used to reduce 2023 taxable income) in the order of the tax years from which the carryovers arose, starting with the earliest year. Reduce the NOL or carryover by one dollar for each dollar of excluded canceled debt.

General business credit carryover. Reduce the credit carryover to or from 2023. Reduce the credit carryovers to 2023 in the order in which they are taken into account for 2023. For more information on the credit ordering rules for 2023, see the Instructions for Form 3800. Reduce the carryover by 33 1 / 3 cents for each dollar of excluded canceled debt.

Minimum tax credit. Reduce the minimum tax credit available at the beginning of 2024. Reduce the credit by 33 1 / 3 cents for each dollar of excluded canceled debt.

Net capital loss and capital loss carryovers. First reduce any 2023 net capital loss and then any capital loss carryover to 2023 (after taking into account any amount used to reduce 2023 taxable income) in the order of the tax years from which the carryovers arose, starting with the earliest year. Reduce the net capital loss or carryover by one dollar for each dollar of excluded canceled debt.

Basis. Reduce the basis of the property you hold at the beginning of 2024 in the following order (and, within each category, in proportion to adjusted basis).

Real property used in your trade or business or held for investment (other than real property held for sale to customers in the ordinary course of business) if it secured the canceled debt.

Personal property used in your trade or business or held for investment (other than inventory and accounts and notes receivable) if it secured the canceled debt.

Any other property used in your trade or business or held for investment (other than inventory, accounts receivable, notes receivable, and real property held for sale to customers in the ordinary course of business).

Inventory, accounts receivable, notes receivable, and real property held primarily for sale to customers in the ordinary course of business.

Personal-use property (property not used in your trade or business nor held for investment).

Reduce the basis by one dollar for each dollar of excluded canceled debt. However, the reduction can't be more than the excess of the total basis of the property and the amount of money you held immediately after the debt cancellation over your total liabilities immediately after the cancellation.

For allocation rules that apply to basis reductions for multiple canceled debts, see Regulations section 1.1017-1(b)(2). Also see Election to reduce the basis of depreciable property before reducing other tax attributes , later.

Passive activity loss and credit carryovers. Reduce the passive activity loss and credit carryovers from 2023. Reduce the loss carryover by one dollar for each dollar of excluded canceled debt. Reduce the credit carryover by 33 1 / 3 cents for each dollar of excluded canceled debt.

Foreign tax credit. Reduce the credit carryover to or from 2023. Reduce the credit carryovers to 2023 in the order in which they are taken into account for 2023. Reduce the carryover by 33 1 / 3 cents for each dollar of excluded canceled debt.

You can elect to reduce the basis of depreciable property you held at the beginning of 2024 before reducing other tax attributes. You can reduce the basis of this property by all or part of the canceled debt. Basis of property is reduced in the following order.

Depreciable real property used in your trade or business or held for investment that secured the canceled debt.

Depreciable personal property used in your trade or business or held for investment that secured the canceled debt.

Other depreciable property used in your trade or business or held for investment.

Real property held primarily for sale to customers if you elect to treat it as if it were depreciable property on Form 982.

Basis reduction is limited to the total adjusted basis of all your depreciable property. Depreciable property for this purpose means any property subject to depreciation or amortization, but only if a reduction of basis will reduce the depreciation or amortization otherwise allowable for the period immediately following the basis reduction. If the amount of canceled debt excluded from income is more than the total basis in depreciable property, you must use the excess to reduce the other tax attributes in the order described earlier under All other tax attributes. In figuring the limit on the basis reduction in (5), Basis, use the remaining adjusted basis of your properties after making this election. See Form 982 for information on how to make this election. The election can be revoked only with IRS consent.

If you reduce the basis of property under these provisions and later sell or otherwise dispose of the property at a gain, the part of the gain due to this basis reduction is taxable as ordinary income under the depreciation recapture provisions. Treat any property that isn't section 1245 or section 1250 property as section 1245 property. For section 1250 property, determine the depreciation adjustments that would have resulted under the straight line method as if there were no basis reduction for debt cancellation. See Pub. 544, or Pub. 225, for more details on sections 1245 and 1250 property and the recapture of gain as ordinary income.

If you exclude canceled debt from income under both the insolvency exclusion and the exclusion for qualified farm indebtedness, you must first reduce your tax attributes by the amount excluded under the insolvency exclusion. Then, reduce your remaining tax attributes (but not below zero) by the amount of canceled debt that qualifies for the farm debt exclusion.

In most cases, when reducing your tax attributes for canceled qualified farm indebtedness excluded from income, reduce them in the same order explained under Bankruptcy and Insolvency , earlier. However, don't follow the rules in item (5), Basis. Instead, reduce only the basis of qualified property. Qualified property is any property you use or hold for use in your trade or business or for the production of income. Reduce the basis of qualified property in the following order.

Depreciable qualified property. You can elect on Form 982 to treat real property held primarily for sale to customers as if it were depreciable property.

Land that is qualified property and is used or held for use in your farming business.

Other qualified property.

If you make an election to exclude canceled qualified real property business debt from income, you must reduce the basis of your depreciable real property (but not below zero) by the amount of canceled qualified real property business debt excluded from income. The basis reduction is made at the beginning of 2024. However, if you dispose of your depreciable real property before the beginning of 2024, you must reduce its basis (but not below zero) immediately before the disposition. Enter the amount of the basis reduction on line 4 of Form 982.

Example 1—qualified real property business indebtedness and insolvency with reduction in basis.

In 2018, you bought a retail store for use in a business operated as a sole proprietorship. You made a $20,000 down payment and financed the remaining $200,000 of the purchase price with a bank loan. The bank loan was a recourse loan and was secured by the property. You used the property in the business continuously since it was purchased and had no other debt secured by that depreciable real property. In addition to the retail store, you owned depreciable equipment and furniture with an adjusted basis of $50,000. Your tax attributes included the basis of depreciable property, an NOL, and a capital loss carryover to 2023.

Your business encountered financial difficulties in 2023. On September 21, 2023, the bank financing the retail store loan entered into a workout agreement with you under which it canceled $20,000 of the principal amount of the debt. Immediately before the bank entered into the workout agreement, you were insolvent to the extent of $12,000. At that time, the outstanding principal balance on the retail store loan was $185,000, the FMV of the store was $165,000, and the adjusted basis was $210,000 ($220,000 cost minus $10,000 accumulated depreciation). The bank sent you a 2023 Form 1099-C showing canceled debt of $20,000 in box 2.

You must apply the insolvency exclusion before applying the exclusion for canceled qualified real property business indebtedness. Under the insolvency exclusion rules, you can exclude $12,000 of the canceled debt from income. You elect to reduce the basis of depreciable property before reducing other tax attributes. Under that election, you must first reduce the basis in the depreciable real property used in the trade or business that secured the canceled debt. After the basis reduction, the adjusted basis in that property is $198,000 ($210,000 adjusted basis before entering into the workout agreement minus $12,000 of canceled debt excluded from income under the insolvency exclusion).

You may be able to exclude the remaining $8,000 of canceled debt from income under the exclusion for qualified real property business indebtedness, if you elect to apply it. The amount you can exclude is limited. It can’t be more than:

$20,000 (the excess of the $185,000 outstanding principal amount of your qualified real property business debt (immediately before the cancellation) over the $165,000 FMV (immediately before the cancellation) of the qualified real property, which secured the debt), or

$198,000 (the total adjusted basis of depreciable real property you held immediately before the cancellation determined after reductions for accumulated depreciation and canceled debt excluded under the insolvency exclusion ($220,000 minus $10,000 minus $12,000)).

Since both limits are more than the $8,000 of remaining canceled debt ($20,000 minus $12,000), you can exclude $8,000 under the qualified real property business indebtedness exclusion.

You check the boxes on lines 1b and 1d of Form 982. You complete Part II of Form 982 to reduce the basis in the depreciable real property by $20,000, the amount of the canceled debt excluded from income. You enter $8,000 on line 4 and $12,000 on line 5.

Example 2—qualified real property business indebtedness with insolvency and reduction in NOL.

You own depreciable real property used in a retail business. Your adjusted basis in the property is $145,000. The FMV of the property is $120,000. The property is subject to $134,000 of recourse debt, which is secured by the property. You had no other debt secured by that depreciable real property. You also had a $15,000 NOL in 2023.

During 2023, you entered into a workout agreement with the lender under which the lender canceled $14,000 of the debt on the real property used in the business. Immediately before the cancellation, you were insolvent to the extent of $10,000. You exclude $10,000 of the canceled debt from income under the insolvency exclusion. As a result of that exclusion, you reduce the NOL by $10,000.

You may be able to exclude the remaining $4,000 of canceled debt from income under the qualified real property business indebtedness exclusion, if you elect to apply it. The amount you can exclude is limited. It can't be more than:

$14,000 (the excess of the $134,000 outstanding principal amount of your qualified real property business debt (immediately before the cancellation) over the $120,000 FMV (immediately before the cancellation) of that qualified real property, which secured the debt), or

$145,000 (the total adjusted basis of depreciable real property held immediately before the cancellation of debt).

Since both limits ($14,000 and $145,000) are more than the remaining $4,000 of canceled debt, you can also exclude the remaining $4,000 of canceled debt.

You check the boxes on lines 1b and 1d of Form 982 and enter $14,000 on line 2. You complete Part II of Form 982 to reduce the basis of depreciable real property and the 2023 NOL by entering $4,000 on line 4 and $10,000 on line 6. None of the canceled debt is included in income.  

2. Foreclosures and Repossessions

If you don't make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. The foreclosure or repossession is treated as a sale from which you may realize gain or loss. This is true even if you voluntarily return the property to the lender. If the outstanding loan balance was more than the FMV of the property and the lender cancels all or part of the remaining loan balance, you may also realize ordinary income from the cancellation of debt. You must report this income on your return unless certain exceptions or exclusions apply. See chapter 1 for more details.

You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale. The gain is the difference between the amount realized and your adjusted basis in the transferred property (amount realized minus adjusted basis). The loss is the difference between your adjusted basis in the transferred property and the amount realized (adjusted basis minus amount realized). For more information on figuring gain or loss from the sale of property, see Gain or Loss From Sales and Exchanges in Pub. 544.

If you are personally liable for the debt, the amount realized on the foreclosure or repossession includes the smaller of:

The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or

The FMV of the transferred property.

In 2022, you paid $200,000 for a home. You made a $15,000 down payment and borrowed the remaining $185,000 from a bank. You are personally liable for the mortgage loan and the house secures the loan. In 2023, the bank foreclosed on the mortgage because you stopped making payments. When the bank foreclosed the mortgage, the balance due was $180,000, the FMV of the house was $170,000, and your adjusted basis was $175,000 due to a casualty loss that was deducted. At the time of the foreclosure, the bank forgave $2,000 of the $10,000 debt in excess of the FMV ($180,000 minus $170,000). You remained personally liable for the $8,000 balance.

In this case, you have ordinary income from the cancellation of debt in the amount of $2,000. The $2,000 income from the cancellation of debt is figured by subtracting the $170,000 FMV of the house from the $172,000 difference between the total outstanding debt immediately before the transfer of property and the amount for which you remain personally liable immediately after the transfer ($180,000 minus $8,000). You are able to exclude the $2,000 of canceled debt from income under the qualified principal residence indebtedness rules, discussed earlier.

You must also determine the gain or loss from the foreclosure. In this case, the amount realized is $170,000. This is the smaller of:

$172,000 (the $180,000 of outstanding debt immediately before the transfer minus $8,000 for which you remain personally liable immediately after the transfer), or

$170,000 (the FMV of the house).

You figure the gain or loss on the foreclosure by comparing the $170,000 amount realized with the $175,000 adjusted basis. You have a $5,000 nondeductible loss.

You bought a new car for $15,000. You made a $2,000 down payment and borrowed the remaining $13,000 from the dealer's credit company. You are personally liable for the loan (recourse debt) and the car is pledged as security for the loan. On August 3, 2023, the credit company repossessed the car because you stopped making loan payments. The balance due after taking into account the payments you made was $10,000. The FMV of the car when it was repossessed was $9,000. On November 16, 2023, the credit company forgave the remaining $1,000 balance on the loan due to insufficient assets.

In this case, the amount you realize is $9,000. This is the smaller of:

$9,000 (the $10,000 outstanding debt immediately before the repossession minus the $1,000 for which you remain personally liable immediately after the repossession), or

$9,000 (the FMV of the car).

You figure the gain or loss on the repossession by comparing the $9,000 amount realized with the $15,000 adjusted basis. You have a $6,000 nondeductible loss. After the cancellation of the remaining balance on the loan in November, you also have ordinary income from cancellation of debt in the amount of $1,000 (the remaining balance on the $10,000 loan after the $9,000 amount satisfied by the FMV of the repossessed car). You must report the $1,000 on the return unless one of the exceptions or exclusions described in chapter 1 applies.

Table 1-1. Worksheet for Foreclosures and Repossessions

If you aren't personally liable for repaying the debt secured by the transferred property, the amount you realize includes the full amount of the outstanding debt immediately before the transfer. This is true even if the FMV of the property is less than the outstanding debt immediately before the transfer.

You paid $200,000 for a home. You made a $15,000 down payment and borrowed the remaining $185,000 from a bank. You aren’t personally liable for the loan, but the loan was secured by a mortgage on the house.

The bank foreclosed on the mortgage because you stopped making payments. When the bank foreclosed on the mortgage, the balance due was $180,000, the FMV of the house was $170,000, and your adjusted basis was $175,000 due to a casualty loss that was deducted.

The amount you realized on the foreclosure is $180,000, the outstanding debt immediately before the foreclosure. You figure the gain or loss by comparing the $180,000 amount realized with the $175,000 adjusted basis. You have a $5,000 realized gain. See Pub. 523, to figure and report any taxable amount.

You bought a new car for $15,000. You made a $2,000 down payment and borrowed the remaining $13,000 from the dealer's credit company. You aren’t personally liable for the loan (nonrecourse), but pledged the new car as security for the loan.

On August 3, 2023, the credit company repossessed the car because you stopped making loan payments. The balance due after taking into account the payments you made was $10,000. The FMV of the car when it was repossessed was $9,000.

The amount you realized on the repossession is $10,000. That is the outstanding amount of debt immediately before the repossession, even though the FMV of the car is less than $10,000. You figure the gain or loss on the repossession by comparing the $10,000 amount realized with the $15,000 adjusted basis. You have a $5,000 nondeductible loss.

A lender who acquires an interest in your property in a foreclosure or repossession should send you Form 1099-A, Acquisition or Abandonment of Secured Property, showing information you need to figure your gain or loss. However, if the lender also cancels part of your debt and must file Form 1099-C, the lender can include the information about the foreclosure or repossession on that form instead of on Form 1099-A. The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or other applicable entity , as discussed earlier in chapter 1 . For foreclosures or repossessions occurring in 2023, these forms should be sent to you by January 31, 2024.

3. Abandonments

You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership but without passing it on to anyone else. Whether an abandonment has occurred is determined in light of all the facts and circumstances. You must both show an intention to abandon the property and affirmatively act to abandon the property.

A voluntary conveyance of the property in lieu of foreclosure isn’t an abandonment and is treated as the exchange of property to satisfy a debt. For more information, see Sales and Exchanges in Pub. 544.

The tax consequences of abandonment of property that secures a debt depend on whether you were personally liable for the debt (recourse debt) or weren’t personally liable for the debt (nonrecourse debt).

In most cases, if you abandon property that secures debt for which you are personally liable (recourse debt), you don't have gain or loss until the later foreclosure is completed. For details on figuring gain or loss on the foreclosure, see chapter 2 .

Example 1—abandonment of personal-use property securing recourse debt.

In 2019, you purchased a home for $200,000. You borrowed the entire purchase price, for which you were personally liable, and gave the bank a mortgage on the home. In 2023, you lost your job and was unable to continue making the mortgage loan payments. Because your mortgage loan balance was $185,000 and the FMV of the home was only $150,000, you decided to abandon the home by permanently moving out on August 1, 2023. Because you were personally liable for the debt and the bank didn't complete a foreclosure of the property in 2023, you have neither gain nor loss in tax year 2023 from abandoning the home. If the bank sells the house at a foreclosure sale in 2024, you will have to figure the gain or nondeductible loss for tax year 2024, as discussed earlier in chapter 2 .

Example 2—abandonment of business or investment property securing recourse debt.

In 2019, you purchased business property for $200,000. You borrowed the entire purchase price, for which you were personally liable, and gave the lender a security interest in the property. In 2023, you were unable to continue making the loan payments. Because the loan balance was $185,000 and the FMV of the property was only $150,000, you abandoned the property on August 1, 2023. Because you were personally liable for the debt and the lender didn't complete a foreclosure of the property in 2023, you have neither gain nor loss in tax year 2023 from abandoning the property. If the lender sells the property at a foreclosure sale in 2024, you will have to figure the gain or deductible loss for tax year 2024, as discussed earlier in chapter 2 .

If you abandon property that secures debt for which you aren't personally liable (nonrecourse debt), the abandonment is treated as a sale or exchange.

The amount you realize on the abandonment of property that secured nonrecourse debt is the amount of the nonrecourse debt. If the amount you realize is more than your adjusted basis, then you have a gain. If your adjusted basis is more than the amount you realize, then you have a loss. For more information on how to figure gain and loss, see Gain or Loss From Sales and Exchanges in Pub. 544.

Loss from abandonment of business or investment property is deductible as a loss. The character of the loss depends on the character of the property. The amount of deductible capital loss may be limited. For more information, see Treatment of Capital Losses in Pub. 544. You can't deduct any loss from abandonment of your home or other property held for personal use.

Example 1—abandonment of personal-use property securing nonrecourse debt.

In 2019, you purchased a home for $200,000. You borrowed the entire purchase price, for which you weren’t personally liable, and gave the bank a mortgage on the home. In 2023, you lost your job and was unable to continue making the mortgage loan payments. Because the mortgage loan balance was $185,000 and the FMV of the home was only $150,000, you decided to abandon the home by permanently moving out on August 1, 2023. Because you weren’t personally liable for the debt, the abandonment is treated as a sale or exchange of the home in tax year 2023. Your amount realized is $185,000 and the adjusted basis in the home is $200,000. You have a $15,000 nondeductible loss in tax year 2023. (Had your adjusted basis been less than the amount realized, you would have had a gain that would have to be included in gross income.) The bank sells the house at a foreclosure sale in 2024. You have neither gain nor loss from the foreclosure sale. Because you weren’t personally liable for the debt, you also have no cancellation of debt income.

Example 2—abandonment of business or investment property securing nonrecourse debt.

In 2019, you purchased business property for $200,000. You borrowed the entire purchase price, for which you weren’t personally liable, and gave the lender a security interest in the property. In 2023, you were unable to continue making the loan payments. Because the loan balance was $185,000 and the FMV of the property was only $150,000, you decided to abandon the property on August 3, 2023. Because you weren’t personally liable for the debt, the abandonment is treated as a sale or exchange of the property in tax year 2023. Your amount realized is $185,000 and the adjusted basis in the property is $180,000 (as a result of $20,000 of depreciation deductions on the property). You have a $5,000 gain in tax year 2023. (Had your adjusted basis been greater than the amount realized, you would have had a deductible loss.) The lender sells the property at a foreclosure sale in 2024. You have neither gain nor loss from the foreclosure sale. Because you weren’t personally liable for the debt, you also have no cancellation of debt income.

If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you will realize ordinary income equal to the canceled debt. This income is separate from any amount realized from abandonment of the property. You must report this income on your return unless one of the exceptions or exclusions described in chapter 1 applies.

In most cases, if you abandon:

Real property (such as a home),

Intangible property, or

Tangible personal property held (wholly or partly) for use in a trade or business or for investment

For abandonments of property and debt cancellations occurring in 2023, these forms should be sent to you by January 31, 2024.

How To Get Tax Help

If you have questions about a tax issue; need help preparing your tax return; or want to download free publications, forms, or instructions, go to IRS.gov to find resources that can help you right away.

After receiving all your wage and earnings statements (Forms W-2, W-2G, 1099-R, 1099-MISC, 1099-NEC, etc.); unemployment compensation statements (by mail or in a digital format) or other government payment statements (Form 1099-G); and interest, dividend, and retirement statements from banks and investment firms (Forms 1099), you have several options to choose from to prepare and file your tax return. You can prepare the tax return yourself, see if you qualify for free tax preparation, or hire a tax professional to prepare your return.

Your options for preparing and filing your return online or in your local community, if you qualify, include the following.

Free File. This program lets you prepare and file your federal individual income tax return for free using software or Free File Fillable Forms. However, state tax preparation may not be available through Free File. Go to IRS.gov/FreeFile to see if you qualify for free online federal tax preparation, e-filing, and direct deposit or payment options.

VITA. The Volunteer Income Tax Assistance (VITA) program offers free tax help to people with low-to-moderate incomes, persons with disabilities, and limited-English-speaking taxpayers who need help preparing their own tax returns. Go to IRS.gov/VITA , download the free IRS2Go app, or call 800-906-9887 for information on free tax return preparation.

TCE. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors. Go to IRS.gov/TCE or download the free IRS2Go app for information on free tax return preparation.

MilTax. Members of the U.S. Armed Forces and qualified veterans may use MilTax, a free tax service offered by the Department of Defense through Military OneSource. For more information, go to MilitaryOneSource ( MilitaryOneSource.mil/MilTax ).

Also, the IRS offers Free Fillable Forms, which can be completed online and then e-filed regardless of income.

Go to IRS.gov/Tools for the following.

The Earned Income Tax Credit Assistant ( IRS.gov/EITCAssistant ) determines if you’re eligible for the earned income credit (EIC).

The Online EIN Application ( IRS.gov/EIN ) helps you get an employer identification number (EIN) at no cost.

The Tax Withholding Estimator ( IRS.gov/W4App ) makes it easier for you to estimate the federal income tax you want your employer to withhold from your paycheck. This is tax withholding. See how your withholding affects your refund, take-home pay, or tax due.

The First-Time Homebuyer Credit Account Look-up ( IRS.gov/HomeBuyer ) tool provides information on your repayments and account balance.

The Sales Tax Deduction Calculator ( IRS.gov/SalesTax ) figures the amount you can claim if you itemize deductions on Schedule A (Form 1040).

IRS.gov/Help : A variety of tools to help you get answers to some of the most common tax questions.

IRS.gov/ITA : The Interactive Tax Assistant, a tool that will ask you questions and, based on your input, provide answers on a number of tax topics.

IRS.gov/Forms : Find forms, instructions, and publications. You will find details on the most recent tax changes and interactive links to help you find answers to your questions.

You may also be able to access tax information in your e-filing software.

There are various types of tax return preparers, including enrolled agents, certified public accountants (CPAs), accountants, and many others who don’t have professional credentials. If you choose to have someone prepare your tax return, choose that preparer wisely. A paid tax preparer is:

Primarily responsible for the overall substantive accuracy of your return,

Required to sign the return, and

Required to include their preparer tax identification number (PTIN).

The Social Security Administration (SSA) offers online service at SSA.gov/employer for fast, free, and secure W-2 filing options to CPAs, accountants, enrolled agents, and individuals who process Form W-2, Wage and Tax Statement, and Form W-2c, Corrected Wage and Tax Statement.

Go to IRS.gov/SocialMedia to see the various social media tools the IRS uses to share the latest information on tax changes, scam alerts, initiatives, products, and services. At the IRS, privacy and security are our highest priority. We use these tools to share public information with you. Don’t post your social security number (SSN) or other confidential information on social media sites. Always protect your identity when using any social networking site.

The following IRS YouTube channels provide short, informative videos on various tax-related topics in English, Spanish, and ASL.

Youtube.com/irsvideos .

Youtube.com/irsvideosmultilingua .

Youtube.com/irsvideosASL .

The IRS Video portal ( IRSVideos.gov ) contains video and audio presentations for individuals, small businesses, and tax professionals.

You can find information on IRS.gov/MyLanguage if English isn’t your native language.

The IRS is committed to serving taxpayers with limited-English proficiency (LEP) by offering OPI services. The OPI Service is a federally funded program and is available at Taxpayer Assistance Centers (TACs), most IRS offices, and every VITA/TCE tax return site. The OPI Service is accessible in more than 350 languages.

Taxpayers who need information about accessibility services can call 833-690-0598. The Accessibility Helpline can answer questions related to current and future accessibility products and services available in alternative media formats (for example, braille, large print, audio, etc.). The Accessibility Helpline does not have access to your IRS account. For help with tax law, refunds, or account-related issues, go to IRS.gov/LetUsHelp .

Form 9000, Alternative Media Preference, or Form 9000(SP) allows you to elect to receive certain types of written correspondence in the following formats.

Standard Print.

Large Print.

Audio (MP3).

Plain Text File (TXT).

Braille Ready File (BRF).

Go to IRS.gov/DisasterRelief to review the available disaster tax relief.

Go to IRS.gov/Forms to view, download, or print all the forms, instructions, and publications you may need. Or, you can go to IRS.gov/OrderForms to place an order.

Download and view most tax publications and instructions (including the Instructions for Form 1040) on mobile devices as eBooks at IRS.gov/eBooks .

IRS eBooks have been tested using Apple's iBooks for iPad. Our eBooks haven’t been tested on other dedicated eBook readers, and eBook functionality may not operate as intended.

Go to IRS.gov/Account to securely access information about your federal tax account.

View the amount you owe and a breakdown by tax year.

See payment plan details or apply for a new payment plan.

Make a payment or view 5 years of payment history and any pending or scheduled payments.

Access your tax records, including key data from your most recent tax return, and transcripts.

View digital copies of select notices from the IRS.

Approve or reject authorization requests from tax professionals.

View your address on file or manage your communication preferences.

With an online account, you can access a variety of information to help you during the filing season. You can get a transcript, review your most recently filed tax return, and get your adjusted gross income. Create or access your online account at IRS.gov/Account .

This tool lets your tax professional submit an authorization request to access your individual taxpayer IRS online account. For more information, go to IRS.gov/TaxProAccount .

The safest and easiest way to receive a tax refund is to e-file and choose direct deposit, which securely and electronically transfers your refund directly into your financial account. Direct deposit also avoids the possibility that your check could be lost, stolen, destroyed, or returned undeliverable to the IRS. Eight in 10 taxpayers use direct deposit to receive their refunds. If you don’t have a bank account, go to IRS.gov/DirectDeposit for more information on where to find a bank or credit union that can open an account online.

Tax-related identity theft happens when someone steals your personal information to commit tax fraud. Your taxes can be affected if your SSN is used to file a fraudulent return or to claim a refund or credit.

The IRS doesn’t initiate contact with taxpayers by email, text messages (including shortened links), telephone calls, or social media channels to request or verify personal or financial information. This includes requests for personal identification numbers (PINs), passwords, or similar information for credit cards, banks, or other financial accounts.

Go to IRS.gov/IdentityTheft , the IRS Identity Theft Central webpage, for information on identity theft and data security protection for taxpayers, tax professionals, and businesses. If your SSN has been lost or stolen or you suspect you’re a victim of tax-related identity theft, you can learn what steps you should take.

Get an Identity Protection PIN (IP PIN). IP PINs are six-digit numbers assigned to taxpayers to help prevent the misuse of their SSNs on fraudulent federal income tax returns. When you have an IP PIN, it prevents someone else from filing a tax return with your SSN. To learn more, go to IRS.gov/IPPIN .

Go to IRS.gov/Refunds .

Download the official IRS2Go app to your mobile device to check your refund status.

Call the automated refund hotline at 800-829-1954.

Payments of U.S. tax must be remitted to the IRS in U.S. dollars. Digital assets are not accepted. Go to IRS.gov/Payments for information on how to make a payment using any of the following options.

IRS Direct Pay : Pay your individual tax bill or estimated tax payment directly from your checking or savings account at no cost to you.

Debit Card, Credit Card, or Digital Wallet : Choose an approved payment processor to pay online or by phone.

Electronic Funds Withdrawal : Schedule a payment when filing your federal taxes using tax return preparation software or through a tax professional.

Electronic Federal Tax Payment System : Best option for businesses. Enrollment is required.

Check or Money Order : Mail your payment to the address listed on the notice or instructions.

Cash : You may be able to pay your taxes with cash at a participating retail store.

Same-Day Wire : You may be able to do same-day wire from your financial institution. Contact your financial institution for availability, cost, and time frames.

The IRS uses the latest encryption technology to ensure that the electronic payments you make online, by phone, or from a mobile device using the IRS2Go app are safe and secure. Paying electronically is quick, easy, and faster than mailing in a check or money order.

Go to IRS.gov/Payments for more information about your options.

Apply for an online payment agreement ( IRS.gov/OPA ) to meet your tax obligation in monthly installments if you can’t pay your taxes in full today. Once you complete the online process, you will receive immediate notification of whether your agreement has been approved.

Use the Offer in Compromise Pre-Qualifier to see if you can settle your tax debt for less than the full amount you owe. For more information on the Offer in Compromise program, go to IRS.gov/OIC .

Go to IRS.gov/Form1040X for information and updates.

Go to IRS.gov/WMAR to track the status of Form 1040-X amended returns.

Go to IRS.gov/Notices to find additional information about responding to an IRS notice or letter.

You can now upload responses to all notices and letters using the Document Upload Tool. For notices that require additional action, taxpayers will be redirected appropriately on IRS.gov to take further action. To learn more about the tool go to IRS.gov/Upload .

You can use Schedule LEP (Form 1040), Request for Change in Language Preference, to state a preference to receive notices, letters, or other written communications from the IRS in an alternative language. You may not immediately receive written communications in the requested language. The IRS’s commitment to LEP taxpayers is part of a multi-year timeline that began providing translations in 2023. You will continue to receive communications, including notices and letters, in English until they are translated to your preferred language.

Keep in mind, many questions can be answered on IRS.gov without visiting a TAC. Go to IRS.gov/LetUsHelp for the topics people ask about most. If you still need help, TACs provide tax help when a tax issue can’t be handled online or by phone. All TACs now provide service by appointment, so you’ll know in advance that you can get the service you need without long wait times. Before you visit, go to IRS.gov/TACLocator to find the nearest TAC and to check hours, available services, and appointment options. Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on “Local Offices.”

The Taxpayer Advocate Service (TAS) Is Here To Help You

TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. TAS strives to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights .

The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Go to TaxpayerAdvocate.IRS.gov to help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them.

TAS can help you resolve problems that you can’t resolve with the IRS. And their service is free. If you qualify for their assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:

Your problem is causing financial difficulty for you, your family, or your business;

You face (or your business is facing) an immediate threat of adverse action; or

You’ve tried repeatedly to contact the IRS but no one has responded, or the IRS hasn’t responded by the date promised.

TAS has offices in every state, the District of Columbia, and Puerto Rico . To find your advocate’s number:

Go to TaxpayerAdvocate.IRS.gov/Contact-Us ;

Download Pub. 1546, The Taxpayer Advocate Service Is Your Voice at the IRS, available at IRS.gov/pub/irs-pdf/p1546.pdf ;

Call the IRS toll free at 800-TAX-FORM (800-829-3676) to order a copy of Pub. 1546;

Check your local directory; or

Call TAS toll free at 877-777-4778.

TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, report it to TAS at IRS.gov/SAMS . Be sure to not include any personal taxpayer information.

LITCs are independent from the IRS and TAS. LITCs represent individuals whose income is below a certain level and who need to resolve tax problems with the IRS. LITCs can represent taxpayers in audits, appeals, and tax collection disputes before the IRS and in court. In addition, LITCs can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee. For more information or to find an LITC near you, go to the LITC page at TaxpayerAdvocate.IRS.gov/LITC or see IRS Pub. 4134, Low Income Taxpayer Clinic List , at IRS.gov/pub/irs-pdf/4134.pdf .

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