What is Insolvency for Tax Purposes?

Services for Real Estate Pros with Backoffice Squared

I represent taxpayers in Gainesville and the state of Florida who have tax issues with the IRS and Florida Department of Revenue. Forgiveness of debt by your creditors sounds great, except. That except is that the amount forgiven by the lender is taxable income to you in the year of forgiveness. A bummer indeed. However, not all is lost. There are exceptions, and the one big exception is if you are insolvent immediately before the discharge.

How is insolvency measured? On the plus side there is the fair market value of all the assets you own. This includes assets you have pledged as collateral for loans and assets that cannot be collected by your creditors such as IRA and retirement accounts. Once you have totaled these various asset values, we move on to the negative side – liabilities.

Liabilities include the following classes:

  1. 100% of recourse debts,
  2.  the amount of nonrecourse debt that is not in excess of the fair market value of the property that is security for the debt, and
  3.  the amount of nonrecourse debt in excess of the of the fair market value of the property that is security provided it has been discharged.

Of course, these liabilities must be legitimate and provable. This is why having a formal loan agreement with your relatives for money loans is so important.

Add the assets and subtract the liabilities. If the result is a negative number, you are insolvent and can exclude the debt forgiveness up to the amount of the insolvency. It’s not all a free ride from here. The amount of excluded income must be applied to various ‘tax attributes” that might have had a future tax benefit.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@backoffice2.net.


Jim Payne, CPA


Gainesville, FL

Cell (352) 317-5692

Office (352) 376-9401

Fax (352) 376-9440





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Sham Reddy CRS
H E R Realty, Dayton, OH - Dayton, OH

I come across it in short sales in real estate.  Some accountants know insolvency inside out and can help you not having to pay taxes on 1099 due to forgiven debt.

Oct 14, 2019 04:32 AM #1
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Jim Payne, CPA

CPA firm practicing in the area of IRS Collections
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