Lenders or creditors are required to issue Form 1099-C, Cancellation of Debt, if they cancel a debt owed to them of $600 or more. Generally, an individual taxpayer must include all canceled amounts (even if less than $600) on the "Other Income" line of Form 1040.
However, under certain circumstances, a taxpayer may not have to include canceled debt in income. For example, if the canceled debt is related to the taxpayer's principal residence, the taxpayer may be able to exclude all or a portion of canceled debt if it is "qualified principal residence indebtedness." The amount excluded due to the "discharge of qualified principal residence indebtedness" is reported on Form 982.
In addition to debtor information, Form 1099-C reports the amount of debt canceled and the date canceled. If the form has event code "A" indicating bankruptcy, or if an amount is included for interest, refer the taxpayer to a professional tax preparer..
Form 982 must be filed with the taxpayer's return to report the excluded amount of discharged indebtedness and the reduction of certain tax attributes. Taxpayers excluding discharged debt from "qualified principal residence indebtedness" must complete only a few lines on Form 982; check the discharge of qualified principal residence indebtedness box and include the amount of debt discharged from Form 1099-C to Form 982. If the taxpayer kept ownership of the home, the basis adjustment to the principal residence for the excluded canceled debt must be reflected on the form.