When a lender cancels your debt, you may have to report this as taxable income on your federal income taxes, unless there is an exception. If you’re required to report the cancelled debt, the lender will send IRS Form 1099-C to you.
The cancellation of debt can take many forms; from a short sale on a house to a negotiated settlement with a credit card company as to your outstanding balance. Any amounts written off by the banks are considered to be ordinary income to the person receiving the benefit of the reduced amount. There are some exceptions to this rule but not all states recognize these exceptions. Before proceeding with a transaction of this type, it is best that you check with a professional to determine the tax ramifications, if any. Feel free to call the office if you need our assistance.
Tags: cancellation of debt
Written by: Doug Rodrigues