Reducing or Eliminating the Tax Impact of the Forgiven Debt
What are the tax implications when someone forgives debt that you legally owe? Is the amount forgiven taxable income to you? It really depends on a variety of facts. In this article, we will briefly address some of the things every taxpayer should know about debt forgiveness. If you have been, or expect to be, the recipient of debt forgiveness, for example, you have sold your house in a short sale or are in negotiations with your bank to receive a discount in the amount of your mortgage, you should work closely with your accountant or tax planner to make sure you properly report the transaction and qualify to exclude the debt forgiven from taxable income.
General Rule. If a debt for which a taxpayer is personally liable, recourse debt, is canceled or forgiven, other than as a gift or bequest, the taxpayer must include the canceled amount in income. However, this realized income may be excluded from taxable income if it meets certain requirements.
Examples of Forgiveness of Indebtedness.