Canceled Debt Is Usually Taxed as Income
When it’s clear you won’t be repaying the money you received, tax law recognizes the money as income.
That means you must report the forgiven amount on your tax return and pay taxes on it, just like any other kind of income, unless you qualify for an exception or exclusion.
How much tax do you have to pay on forgiven debt?
According to the IRS, if a debt is canceled, forgiven or discharged, you must include the canceled amount in your gross income and pay taxes on that “income,” unless you qualify for an exclusion or exception. Creditors who forgive $600 or more of debt for you are required to file Form 1099-C with the IRS.
Do you have to pay taxes on loan forgiveness?
Some loan forgiveness programs are taxable and some are not. Under current law, the amount forgiven generally represents taxable income for income tax purposes in the year it is written off. There are, however, a few exceptions.
Is Cancellation of Debt taxable?
The lender is usually required to report the amount of cancelled debt to both you and the IRS on a Form 1099-C, Cancellation of Debt. However, just because you don’t receive a Form 1099-C, doesn’t mean that you don’t have cancellation of debt income. Cancellation of debt income is not always taxable.
Do you owe taxes on foreclosure?
Foreclosure Can Trigger Capital Gains and Canceled Debt Income Taxes. As far as the Internal Revenue Service is concerned, a foreclosure is the same as the sale of a property. The bottom line is that it once was yours and now it’s not.