Criteria for Canceled Principal Residence Debt

You may assist taxpayers who meet the following requirements:

• The home was never used in a business or as rental property
• The debt was not canceled because the taxpayer filed bankruptcy
• The taxpayer is not in bankruptcy when he/she comes to the site for assistance
• Form 1099-C does not include an amount for interest
• The debt must be a mortgage used only to buy, build, or substantially improve the taxpayer's primary residence, i.e., this money was not used to pay off credit cards, medical/dental expenses, vacations, etc.
• The mortgage was secured by the taxpayer's primary residence
• The mortgage was not more than $2 million ($1 million if Married Filing Separately)

If the taxpayers do not meet these requirements, they may still qualify for the exclusion. However, the issues may be complex and beyond the scope of VITA/TCE. These taxpayers should be referred to a professional tax preparer and the volunteer should provide the taxpayer with a comprehensive list of resources and other possible referrals that are provided in Publication 4731-A, Screening Sheet for Foreclosures/Abandonments and Cancellation of Debt.

Click here to view Publication 4731-A, which provides step-by-step guidance for the volunteer tax-return preparer to determine if the cancellation of debt is within scope. Part I addresses foreclosure and abandonment; Part II addresses home mortgage loans; and Part III addresses canceled credit card debt.