1099-C After Mortgage Modification

[Chowdahead]

Have a client who lives in her 3 Family Property. She worked out a loan modificatio with her bank. The bank issued her a 1000-C for a cancelled debt of $144, 094 (Box 2).

Box 7 indicates fair market value of $89,000. The other 2 apartments are rented, she lives in the third.

I have seen a 1099-A issues, but this is the first time I have seen a 1099-C for this much. How would you guys handle this. I assuming this entire amount is not going to go on Line 21 of the 1040. Given the signficant depreciation of the property to $89,000, and the fact that it's 66.6% rental property.

Is the IRS really going after the gazillion homeowners receiving these forms with all the modications being performed?

[joanmcq]

If the loan mod was for reduction of principal, then yes, she has COD income. Part can likely be excluded by the princpal residence exclusion, and part under qualified real business property indebtedness. You'd also look at insolvency. Any of these (since she still owns the property) would result in a reduction in the basis of the property for the amount of cancelled debt.

[Chowdahead]

Thank you!