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Publication 17

Canceled Debts(p89)

In most cases, if a debt you owe is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in your income. You have no income from the canceled debt if it’s intended as a gift to you. A debt includes any indebtedness for which you’re liable or which attaches to property you hold.
If the debt is a nonbusiness debt, report the canceled amount on Form 1040, line 21. If it’s a business debt, report the amount on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) (or on Schedule F (Form 1040), Profit or Loss From Farming, if the debt is farm debt and you‘re a farmer).

Form 1099-C.(p89)

If a federal government agency, financial institution, or credit union cancels or forgives a debt you owe of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. The amount of the canceled debt is shown in box 2.
Interest included in canceled debt.(p89)
If any interest is forgiven and included in the amount of canceled debt in box 2, the amount of interest also will be shown in box 3. Whether or not you must include the interest portion of the canceled debt in your income depends on whether the interest would be deductible when you paid it. See Deductible debt under Exceptions, later.
If the interest wouldn’t be deductible (such as interest on a personal loan), include in your income the amount from Form 1099-C, box 2. If the interest would be deductible (such as on a business loan), include in your income the net amount of the canceled debt (the amount shown in box 2 less the interest amount shown in box 3).

Discounted mortgage loan.(p89)

If your financial institution offers a discount for the early payment of your mortgage loan, the amount of the discount is canceled debt. You must include the canceled amount in your income.

Mortgage relief upon sale or other disposition.(p89)

If you’re personally liable for a mortgage (recourse debt), and you’re relieved of the mortgage when you dispose of the property, you may realize gain or loss up to the fair market value of the property. Also, to the extent the mortgage discharge exceeds the fair market value of the property, it’s income from discharge of indebtedness unless it qualifies for exclusion under Excluded debt, later. Report any income from discharge of indebtedness on nonbusiness debt that doesn’t qualify for exclusion as other income on Form 1040, line 21.
If you aren’t personally liable for a mortgage (nonrecourse debt), and you’re relieved of the mortgage when you dispose of the property (such as through foreclosure), that relief is included in the amount you realize. You may have a taxable gain if the amount you realize exceeds your adjusted basis in the property. Report any gain on nonbusiness property as a capital gain.
See Pub. 4681 for more information.

Stockholder debt.(p89)

If you’re a stockholder in a corporation and the corporation cancels or forgives your debt to it, the canceled debt is a constructive distribution that’s generally dividend income to you. For more information, see Pub. 542, Corporations.
If you’re a stockholder in a corporation and you cancel a debt owed to you by the corporation, you generally don’t realize income. This is because the canceled debt is considered as a contribution to the capital of the corporation equal to the amount of debt principal that you canceled.

Repayment of canceled debt.(p89)

If you included a canceled amount in your income and later pay the debt, you may be able to file a claim for refund for the year the amount was included in income. You can file a claim on Form 1040X if the statute of limitations for filing a claim is still open. The statute of limitations generally doesn’t end until 3 years after the due date of your original return.


There are several exceptions to the inclusion of canceled debt in income. These are explained next.

Student loans.(p89)

Certain student loans contain a provision that all or part of the debt incurred to attend the qualified educational institution will be canceled if you work for a certain period of time in certain professions for any of a broad class of employers.
You don’t have income if your student loan is canceled after you agreed to this provision and then performed the services required. To qualify, the loan must have been made by:
  1. The federal government, a state or local government, or an instrumentality, agency, or subdivision thereof;
  2. A tax-exempt public benefit corporation that has assumed control of a state, county, or municipal hospital, and whose employees are considered public employees under state law; or
  3. An educational institution:
    1. Under an agreement with an entity described in (1) or (2) that provided the funds to the institution to make the loan; or
    2. As part of a program of the institution designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or a tax-exempt organization described in section 501(c)(3).
A loan to refinance a qualified student loan also will qualify if it was made by an educational institution or a qualified tax-exempt organization under its program designed as described in (3)(b) above.
Education loan repayment assistance.(p89)
Education loan repayments made to you by the National Health Service Corps Loan Repayment Program (NHSC Loan Repayment Program), a state education loan repayment program eligible for funds under the Public Health Service Act, or any other state loan repayment or loan forgiveness program that’s intended to provide for the increased availability of health services in underserved or health professional shortage areas aren’t taxable.

Deductible debt.(p89)

You don’t have income from the cancellation of a debt if your payment of the debt would be deductible. This exception applies only if you use the cash method of accounting. For more information, see chapter 5 of Pub. 334, Tax Guide for Small Business.

Price reduced after purchase.(p89)

In most cases, if the seller reduces the amount of debt you owe for property you purchased, you don’t have income from the reduction. The reduction of the debt is treated as a purchase price adjustment and reduces your basis in the property.

Excluded debt.(p89)

Don’t include a canceled debt in your gross income in the following situations.