How to Estimate Asset Values for Insolvency & Cancellation of Debts

When a taxpayer is insolvent, it means that her total debts are greater than her total assets. If all or a portion of the taxpayer's debts are canceled by her creditors, usually the amount that's canceled is added to the taxpayer's income. However, if the taxpayer can prove that she was still insolvent after the debt was canceled, then she doesn't have to pay income tax on the canceled debt. If this describes you, to determine insolvency you'll need to know how much your assets were worth on the day before and after the debt's cancellation.

List the total assets you owned on the date prior to your debt cancellation. Assets include checking and savings account balances and retirement account balances, as well as non-liquid assets such as your home, car, and belongings,such as furniture, art work and jewelry. The amount and date of debt cancellation is reported on Form 1099-C, and you'll need this date to estimate your asset values properly. For example, if your debt was canceled on August 16, you'll need to make a list of all the assets and debts you owned on August 15.

Verify your asset values from one day prior to the debt cancellation. Some assets, like retirement and checking account values, are easy to verify as of a certain date -- in this example, you'll need to verify your account balances as of August 15; call your bank and account custodians to request these balances. Other assets, like real estate, art work or automobiles, may be more difficult. The IRS accepts fair market valuation for insolvency purposes. Fair market value is what the asset would sell for in a non-distressed sale. Belongings such as furniture or clothes can be valued using thrift shop valuation.

Verify your asset values from one day post-cancellation. To qualify as insolvent, you'll need to show that your total debt still exceeded your total assets even after some of the debt was canceled. Non-liquid assets like your home and car probably didn't change much in value over two days, but your bank and retirement accounts may have. In this example, you'll need asset valuations for your list on August 17.

File Form 982 with your Form 1040 to qualify for insolvency. Form 982 is where you show the IRS how much you had in total assets and debts before and after your debt cancellation. If your assets exceeded your debts one day post-cancellation, you'll owe income tax to the extent you weren't insolvent. If your debts exceeded your assets, you're exempt from income tax on the canceled debt.


  • You may wish to secure an appraisal or market evaluation by a professional; if your tax return is audited, you'll need evidence to support your valuations, and the IRS may not accept your word. Be sure to indicate that you need the valuation as of a certain date. Mortgage debt that's forgiven may be automatically excludable thanks to the Mortgage Debt Forgiveness Relief Act; check with a tax professional to see if you qualify for this exclusion.


  • Work with a tax professional to complete Form 982. The IRS strongly recommends this approach. If you fill out the form yourself and do it wrong, you'll be subject to additional taxes and penalties.