FEDERAL & CALIFORNIA taxes : Calculating insolvency for tax purposes


LoanSafe Member
May 3, 2013
Hello all,

How is insolvency determined / established for the purposes of determining if a former homeowner can avoid Cancellation Of Debt Income taxes on foreclosed home mortgage loans ?

Do we include retirement account assets such as 401Ks and Roth IRAs ?

For example, if the home was purchased for $600K and sold at auction for $485K, that is a difference of $115K that would count as "phantom income" to the homeowner, right ? Which, at the 25 percent tax bracket, is $27,500 owed to Uncle Sam ? (Not sure how much we would owe in California income taxes).

So, if we have even $1 more than $115K in retirement assets, does that mean that we won't qualify for insolvency ? How does this work ?

Thank you for your help / advise.
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LoanSafe Guide
Jun 18, 2009
SF Bay Area CA

Thanks for your post.

I recommend you visit the IRS site. There you can find complete details on how to figure insolvency and how to complete IRS form 982.


LoanSafe Member
Oct 9, 2013
New Jersey
You want publication 4681 - the instruction side of the form 982 Mr. Eason mentioned. A short answer to your main question is yes, they include IRA. That seems illogical since IRAs are exempt from attachment by a creditor but, they are an asset. You'[ll also see on the worksheet all the other nonsense that's included - there's a worksheet in the 4681. The insolvency isn't as simple as it might seem at first glance, which is why so many are anxiously hoping that the Mortgage Debt forgiveness relief act is renewed. In my situation, I'm stringing everything along and delaying things as much as possible in that hope, otherwise it's a bankruptcy for me.