After Tom became ill and could not work full time, he and his wife, Grace, were having difficulty making their mortgage payments. Rather than go through the expense of a foreclosure, the lender agreed to reduce the principal on their loan and refinance it with a better interest rate and lower payments. The principal balance before the November 1 of the current year workout was $130,000, and the lender reduced the loan to $110,000. None of the loan proceeds were used for any purpose other than to buy, build, or substantially improve the principal residence. The home has never been used for business or as rental property, and the taxpayers have not filed for bankruptcy.

Click here to see Tom and Grace's Form 1099-C.

Click here to view Publication 4731-A, the Screening Sheet for Foreclosures/Abandonments and Cancellation of Debt.

Based on this information, what should the volunteer do?

	Refer Tom and Grace to another source for tax return preparation
	Report the reduction in the basis of the home on line 10b of Form 982
	Report the $20,000 as a loss on Schedule D
	Include the debt cancellation amount in income