Cancellation of Debt Income

Debt Income

Many people receive income without even being aware of it.  If you owe a debt, and the debt is forgiven or canceled, the Internal Revenue Code treats this canceled debt as income. Let’s say you owe on your credit cards. You reach an agreement to pay a portion of the total amount owed, and the credit card company agrees to forgive the remainder of the debt. You may be taxed on the amount that you were forgiven.  Also, if bank forecloses on your home, the IRS may view mortgage debt that was canceled as income.

The debtor generally has cancellation of debt income for the amount of the canceled debt when it is forgiven, or the lender decides that it cannot collect.  A lender must send a Form 1099-C to the debtor and to the IRS if the amount of the debt the lender reduced or canceled is $600.00 or more.  There are, however, several exceptions to this rule and situations where the canceled debt is not treated as income.


A few of the exceptions to cancellation of debt income are (1) amounts canceled as gifts or inheritances, (2) certain qualified student loans canceled after fulfilling certain requirements, such as serving as a doctor in a specific region, and (3) debt that would be deductible if you paid the debt.

In other instances, the IRS excludes cancellation of debt income from income, such as debt canceled during a bankruptcy case and debt canceled due to insolvency (a debt exceeds your equity in your assets). The IRS may also exclude cancellation of qualified real property business indebtedness and cancellation of qualified principal residence indebtedness, which is debt forgiven in a foreclosure, short sale or mortgage workout for a principal residence. But the arrangement must be in writing and agreed upon before January 1, 2018.

You can use the Interactive Tax Assistant on the IRS’ website at (it is under the Additional Topics). This is a helpful tool if you are unsure if you received taxable cancellation of debt income on your personal residence in 2017 or earlier,

There are many complicated rules regarding when canceled debt is treated as income.  It is a good idea to seek the advice of a tax professional if you have any questions, or doubt about whether to report cancellation of debt income on your tax return.