Is Canceled Debt Taxable?

Generally, debt that is forgiven or canceled by a lender is considered taxable income by the Internal Revenue Service and must be included as income on your tax return.  Examples include a debt for which you are personally liable such as mortgage debt, credit card debt, and in some instances, student loan debt.  When that debt is forgiven, negotiated down (when you pay less than you owe), or canceled you will receive Form 1099-C, Cancellation of Debt, from your financial institution.  Form 1099-C shows the amount of cancelled or forgiven debt that was report to the IRS.  Creditors who forgive $600 or more of debt are required to issue this form. 

If you receive a form 1099-C, don’t ignore it!  You may not have to report that entire amount shown on Form 1099-C as income. The amount, if any, you must report depends on all the facts and circumstances. Generally, however, unless you meet an exception or exclusion, you must report any taxable canceled debt reported on Form 1099-C as ordinary income on:

-          Form 1040 or Form 1040NR, if the debt is a nonbusiness debt;

-          Schedule C or Schedule C-EZ (Form 1040), if the debt is related to a nonfarm sole proprietorship;

-          Schedule E (Form 1040), if the debt is related to non-farm rental of real property;

-          Form 4835, if the debt is related to a farm rental activity for which you use Form 4835 to report farm rental income based on crops or livestock produced by a tenant; or

-          Schedule F (Form 1040), if the debt is farm debt and you are a farmer.