How should an insolvency worksheet be completed if my wife received a 1099-C for our home equity line of credit?

My wife received a 1099-C for the forgiveness of debt on a home equity line of credit. The home/title is in both of our names. The first mortgage is in both our names. The line of credit was in her name only. If she files married separately, I have a question about filling out the insolvency worksheet. On the asset side, can she claim just half the fair market value (FMV) of the home since I am entitled to half the value? From the debt side, can she list the full first mortgage amount since she would be responsible for paying the full mortgage even if I do not pay it? If she is allowed to do this, we/she can exclude a significant portion of the forgiven debt.

While the instructions for the insolvency worksheet do not spell out how to divide shared assets, the general rule is that you cannot have it both ways: if the personal residence is a shared asset and she reports half, then the mortgage is a shared liability and she reports half. It is not a valid assumption that if you both default, the lender can go after your wife. The lender would first go after the residence. That is the position I would take with my own clients.

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Answered by: Dafna Meltzer, CPA, is with Meltzer & Meltzer CPAs in Elkins Park, Pa.