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IRS FORM 982 allows for exclusion of discharged indebtedness for principle residence, (line 1e). What is the time test?

San Diego, CA |

FOR MY PRINCIPLE RESIDENCE: 1. I secured a construction to perm loan to build a house in 2006. 2. House was developed to 70% completion and bank stopped funding, (siting large loss in TMV). 3. House was short sold. 4 IRS claims the entire deficiency judgement was a taxable event. 4. Filing for that year I want to exclude that from my taxable income. 5. since I lived at the property DURING construction I want to claim it as my PRINCIPLE RESIDENCE and check box 1e on IRS FORM 982. 6. However, what is the time test since I lived there 1 year. 7. The instructions for IRS FORM 982 mention NOTHING about minimum time of ownership only that it is the principle residence. (page 4 of the instructions.)

Attorney Answers 3


1. They may look at your historical residences, bank account billing address, driver's license address, etc. Do yo have these facts for the whole year?

2. What about the net worth test as another exception?

3. Do you have photos to support livability and the fact that you occupied it?

4. If you live in California, what makes the "deficiency judgement" as you put it "recourse"??? Why is it not a non=recourse obligation? especially if you were living there? If you say "it was a construction loan", then "why wasn't it a non-recourse as to the part necessary to bring you to the point of being able to live there?

5. What tax year are you dealing with?

6. What was your official address for FTB and IRS when you were living there?

7. You said "deficiency judgement", but what was the gain/loss based upon your land and your materials / labor basis?

8. Cancellation of debt won't work for second homes (and thus it is critical that you can show that this is you REAL PRINCIPAL RESIDENCE).

9. Cancellation of Qualified Principal Residence Indebtedness was for 2007-2012
Hire a local attorney to help you bring out the factors.

10. It is said by some commentators that Sec 108(a)(1)(E), "qualified residence" has the same meaning as used in IRC Sec 121, which requires the taxpayer to own and use the residence for two of the five years preceding the sale by the taxpayer. I can't help with this because you gave the loan date and nothing more.

From the facts I can't tell what's going on. Sit down with a local tax attorney and examine the regs, including section 121, with ALL your facts and WHY you are doing this now with only one year living in the house (assuming you can prove it?)

Good luck, I can't tell what you are trying to do time wise? recency? etc.

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Curt Harrington
Certified Tax Specialist -- State Bar of California Board of Legal Specialization
Electrical-Chemical-Mechanical Patent (Intellectual Property) Attorney
(562) 594-9784
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Curt Harrington Patent & Tax Law Attorney Certified Tax Specialist by the California Board of Legal Specialization PATENTAX.COM This communication is general information and not legal advice, and does not create an attorney-client relationship. This communication should not be relied upon as any type of legal advice. Please note that no attorney-client relationship exists between the sender and the recipient of this message in the absence of either (1) a signed fee contract and (2) remission of an agreed-upon retainer. Absent such an agreement and retainer, I am not engaged by you as an attorney, nor is any other member of my law firm.

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You need a tax lawyer. I am not a tax lawyer. Don't use your subjective belief in dealing with the IRS. However, when the tax lawyer agrees with the IRS's assessment, just work out a payment plan that you can live with. Bankruptcy is not an option with the IRS. Edward C. Ip

No attorney / client relationship established. The answr is for discussion and general information only. The lawyer had not reviewed any documents or contract prior to the above comments.

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This is a complicated matter and you need to hire a tax attorney. Principal residence requires you live there 2 out of prior 5 years, so you probably don't qualify anyway. A deficiency judgment is not a taxable event but a 1099-C discharge of indebtedness could be unless you were insolvent. Principal residence deduction comes into play only when you have a gain.

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