Cancelled Debt Can Be Considered Income

Sometimes, those you owe money to may consider the debt forgiven, and cancel the remaining balance. In these situations, you’ll likely still have to pay tax on the amount forgiven, as the IRS considers the balance to be a form of income. You’ll be responsible for paying tax on the cancelled debt.

Debt is defined as any amount owed that you are fully liable for paying, such as credit card balances. It also includes amounts that you are responsible for up to the value of the property used to secure the debt. One example of this is a loan, backed by the actual property of the home for which the loan is taken. These types of debt can be cancelled due to foreclosure, repossession, voluntary surrender of the property to the lender, abandonment, or a change to the original loan.

Unless you are subject to an exception or specific exclusion, the cancelled debt is included in your income. Typically, you’ll receive a Form 1099-C, Cancellation of Debt, sent by the lender or debtor who cancelled the loan.

Some debt can be subject to an exception, meaning it’s not required to be included in your income, if it is cancelled or forgiven. Examples of the type of debt that can be excluded when cancelled:

  • Certain loan forgiveness
  • Debt cancelled as a gift, inheritance, devise, or bequest
  • Qualifying purchase price reductions offered by the seller
  • Title 11 bankruptcy debt
  • Qualified real property indebtedness
  • Qualified principal home indebtedness
  • Qualified farm indebtedness
  • Insolvency debt
  • Deductible payments made on the debt
  • up to $2,000,000 ($1,000,000 if filing married, separate) of principal residence indebtedness