Tax Issues Related To Cancellation Of Indebtedness Income
Taxpayers may have tax consequences when debt is forgiven or discharged for less than the full amount owed. This is commonly known as COD (Cancellation of Debt) Income. According to the IRS, the discharge of indebtedness must be included in a taxpayer’s gross income.
Generally, any creditor cancelling debt of $600 or more is required to file Form 1099-C by January 31st of the next year following the date when the debt was canceled
If you received a Form 1099-C showing incorrect information, contact the creditor to make corrections.
Not all COD income must be included in gross income. There are several exceptions.
- Bankruptcy-the debt was discharged as a part of a bankruptcy proceedings.
- Insolvency-the debt is excluded from income if immediately before the debt was cancelled, you were insolvent, i.,e the total of all of your liabilities exceed the fair market value of your assets.
- Qualified Real Property Business Indebtedness. The debt is excluded from income if (1) it was incurred with real property used in a trade or business and (2) the debt was secured by real property.
- Qualified Principal Residence Indebtedness. The debt is excluded from income if it was incurred to buy, build, or improve your main home and must be secured by the home.
If you have any questions about the taxation of cancellation of indebtedness income, please let us know.