“I'm trying to fill out Form 982, but don't know whether to check box 1b (insolvency...which we were) or 1e (discharge of principal residence indebtedness) or both.”====== Generally, the amount by which you benefit from the discharge of indebtedness is included in your gross income ;discharge of indebtedness conveys forgiveness of, or release from, an obligation to repay..However, under certain circumstances, you may exclude the amount of discharged indebtedness from your gross income by filing Form 982 to report the exclusion and the reduction of certain tax attributes either dollar for dollar or $.33.33 cents per dollar. as you are completing this form because of a discharge of indebtedness on a loan for the purchase of your principal residence, part or all of your debt may not qualify for the exclusion on line 1e but may qualify for one of the other exclusions.you need to check the box on line 1e. Include on line 2 the amount of discharged qualified principal residence indebtedness that is excluded from gross income. Any amount in excess of the excluded amount may result in taxable income. If you disposed of your residence, you may also be required to recognize a gain on its disposition.. In this case, you need to enter on line 10b the smaller of (a) the amount of qualified principal residence indebtedness included on line 2 or (b) the basis (generally, your cost plus improvements) of your principal residence.If the discharge occurs in a title Ch11 case, you may not check box 1e. You must check box 1a and complete the form under A nonbusiness debt. If you are insolvent (and not in a title 11 case; A title 11 case is a case under title 11 of the United States Code (relating to bankruptcy), but only if you are under the jurisdiction of the court in the case and the discharge of indebtedness is granted by the court or is undera plan approved by the court), you can elect to follow the insolvency rules by checking box 1b instead. However, the insolvency exclusion does not apply to anydischarge that occurs in a title 11 case. It also does not apply to a discharge of qualified principal residence indebtedness UNLESS you elect to have the insolvency exclusion apply instead of the exclusion for qualified principal residence indebtedness.You need to check the box on line 1b if the discharge of indebtedness occurred while you were insolvent. You were insolvent to the extent that your liabilities exceeded the fair market value of your assets immediately before the discharge. For example, assume that you were released from your obligation to pay your personal debt in the amount of $5K. The FMV of your total assets immediately before the discharge was $9K and your liabilities were $11K. You were insolvent to the extent of $2K ($11K of total liabilities minus $9K of total assets). Youneeed to check the box on line 1b and include $2K on line 2.
“Also, are we required to write that same amount in Part II (Reduction of Tax Attributes)? If so, on which line should we write it?”=======it depends. If you do not operate a business or have real property used in a business ignore lines 4 through 7. Line 8 refers to AMT credit you may be carrying forward from a prior year. If you do not have any AMT Tax credit ignore this line as well. Line 9 refers to any capital loss carryforwards you may have from prior reported losses on Sch D that you were unable to deduct. If you have some capital loss carryfowards then you will enter on this line the lesser of the capital loss carryforward or the debt discharged (in which case your done with the form). If you do not have any capital loss carryforwards ignore line 9. Line 10 is used if you have other depreciable or non-depreciable property (i.e. a principal residence, rental residence, autos, furnishings, etc.). You may enter the lesser of your cost basis or the remaining discharged debt not claimed on lines 4-9. Please note that you are limited in the amount you may reduce your cost basis in these types of assets to the excess of your cost basis over your other non-discharged debt. For example, assume you have qualifying assets whose cost basis is $30k and other non-discharged debts and liabilities of $20k. If you have discharged debt of $15k you may only defer recognizing as income $10k of the cancelled debt since your property cost basis only exceeds your other debt by $10k. The remining $5k would have to be recognized as income.