Preface: “Forgiveness is the economy of the heart… forgiveness saves the expense of anger, the cost of hatred, the waste of spirits.” — Hannah More
What Does and Does Not Constitute Cancellation of Debt Income
This blog provides information about Cancellation of Debt (COD) income. If a lender forgives part or all of a debt you owe, you might have to pay income tax on the forgiven amount. This is because canceled or forgiven debt is considered taxable income, even if you didn’t receive any money directly.
Key Points:
Taxable Income: Generally, canceled debt must be included in your taxable income. This is known as COD income. Unless an exception applies, forgiven debt is considered income.
Form 1099-C: If the forgiven amount is $600 or more, the lender must issue Form 1099-C to you and the IRS, showing the canceled amount. You might be able to exclude this from income under certain conditions.
Exclusions from Income: COD income isn’t always taxable. Common exclusions include:
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- Bankruptcy under Title 11
- Insolvency (when your total debts exceed your total assets)
- Qualified principal residence debt (up to $750,000, or $375,000 for married filing separately, forgiven before January 1, 2026)
- Qualified farm debt
- Qualified real property business debt
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Other exclusions may apply to student loans, disaster victims, gifts, general welfare payments, and deductible payments.
Reduction of Attributes: If debt is excluded from income, you may need to reduce tax attributes, like the basis of property. This must be reported on Form 982 with your tax return.
Non-Recourse Loans: For non-recourse loans (where the lender can only repossess the property and not pursue you personally), forgiveness doesn’t result in COD income but may have other tax implications.
Mortgage Debt Forgiveness: Certain mortgage debt forgiven by the lender is excludable from COD income if it’s related to your principal residence and forgiven before January 1, 2026. This is limited to $750,000 ($375,000 for married filing separately).
Credit Card and Car Loan Debt: Forgiven credit card or car loan debt is generally taxable unless you’re bankrupt or insolvent. The lender will report this on Form 1099-C.
If you have questions about COD income, exclusions, or your reporting responsibilities, please contact our office.