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Q+A: Is My Canceled Debt Really Canceled?

… According to the IRS, not necessarily.

Could my Canceled Debt be Taxable?

Yes. Typically, loan proceeds are not income because there is an obligation to repay. According to the IRS, when a lender forgives a debt it is considered income.

What Count as Income Anyway?

The IRS is concerned with gross income (i.e. “all income from whatever source derived”). If it is not debt canceled by bankruptcy or other qualified indebtedness, certain qualified student loans, a gift, or a bequest, it is income.

What About Income from my Canceled Mortgage Debt?

Income from mortgage debt cancellation is usually taxable. However, the Mortgage Forgiveness Debt Relief Act of 2007 allows the exclusion of mortgage modification income. But only between the years 2007 through 2012.

What About Credit Card Debt Forgiveness?

In some cases, non-business credit card debt cancellation may be excluded from taxable income, but only if the cancellation is a result of bankruptcy or insolvency.

Where Can I Learn More About Canceled Debt Counting as Income?

The IRS has prepared an FAQ Page and Publication 4681 “Canceled Debts, Foreclosures, Repossessions, and Abandonments.”

Source(s): IRS, U.S. Code, CreditCards.com, and Small Biz Accounting Specialist.

2 Responses
  1. David Kane, CPA

    This is a question we get presented during divorce from a spouse that is no longer accountable for a debt. When couples go through the property settlement process, they are trading assets and debts to achieve an equitable settlement and the debts are not treated as income.

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