Qualified principal residence indebtedness exclusion extended.(p1)
The Emergency Economic Stabilization Act of 2008 extended the exclusion from gross income for the discharge of qualified principal residence indebtedness by an additional 3 years. This exclusion now applies to debt discharged after 2006 and before 2013.taxmap/pubs/p4681-000.htm#en_us_publink1000158237
Qualified Midwestern disaster area indebtedness.(p1)
The Heartland Disaster Tax Act Relief of 2008 allows qualified individuals to exclude from gross income discharges of certain indebtedness because of Midwestern disasters. See Qualified Midwestern Disaster Area Indebtedness on page 8.taxmap/pubs/p4681-000.htm#en_us_publink1000158238
Reacquisition of business debt.(p1)
The American Recovery and Reinvestment Act of 2009 allows certain businesses to elect to defer and include ratably over 5 tax years any income from the cancellation of business debt arising from the reacquisition of certain types of business debt repurchased in 2009 or 2010. If you make this election, you cannot exclude for the taxable year of the election or any subsequent taxable year the income from the cancellation of such indebtedness based on a title 11 bankruptcy case, insolvency, qualified farm indebtedness, or qualified real property business indebtedness. For more details, including how to make the election, see section 108(i).taxmap/pubs/p4681-000.htm#en_us_publink1000117377
Canceled debt on your principal residence.(p2)
If you had debt canceled on your principal residence in 2008, you may be able to exclude part or all of the amount canceled from your income. However, if you continue to own your residence after the cancellation, you must reduce the basis of your principal residence (but not below zero) by the amount excluded from income. For more information, see Qualified Principal Residence Indebtedness, later.taxmap/pubs/p4681-000.htm#en_us_publink100080212
Photographs of missing children.(p2)
The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that otherwise would be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.
This publication explains the federal tax treatment of canceled debts, foreclosures, repossessions, and abandonments.
Generally, if you owe a debt to someone else and they cancel or forgive that debt, you are treated for income tax purposes as having income and may have to pay tax on this income. This publication refers to this as "canceled debt" whether it is canceled or forgiven. However, under certain circumstances, you may not have to include canceled debt in income. If you do exclude canceled debt from income, you may also be required to reduce "tax attributes." Reduction of tax attributes is discussed in more detail later in this publication.
If you have property that is security for a debt and that property is taken by the lender in full or partial satisfaction of your debt, you will be treated as having sold that property and may have gain or loss as a result. For this purpose, it does not matter whether the lender took the property through foreclosure, repossession, a voluntary conveyance by you to the lender, or your abandonment of the property. If the lender cancels debt in excess of the fair market value (FMV) of the property taken by the lender, the excess of the canceled debt over the FMV of the property may have to be treated by you as ordinary income from the cancellation of debt in addition to any taxable gain that you may have had from being treated as having sold the property.
If you are treated as having sold the property, any gain you have will generally have to be reported on your income tax return. If you have a loss, you may be entitled to deduct the loss if the property that was returned to the lender is business or investment property, but not if it is personal use property, such as your residence.
This publication discusses the general rule requiring canceled debt to be included in income, exceptions to the general rule, exclusions from the general rule, and the ordering rules for reduction of tax attributes by reason of the exclusion of canceled debt from income. This publication also discusses the tax treatment resulting from foreclosures, repossessions, and abandonments and provides detailed examples with filled-in forms.taxmap/pubs/p4681-000.htm#en_us_publink100080213
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You may want to see:
Publication 225 Farmer's Tax Guide 334 Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ) 523 Selling Your Home 525 Taxable and Nontaxable Income 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 908 Bankruptcy Tax Guide Form (and Instructions) 982: Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)taxmap/pubs/p4681-000.htm#en_us_publink100080216
The sections of this publication that will apply to you depend on the type of debt canceled, the tax attributes you have, and whether or not you continue to own the property that was subject to the debt. Some examples illustrating common circumstances are provided below to help guide you through this publication. These examples do not cover every canceled debt situation, but are intended to provide general guidance for the most common situations.taxmap/pubs/p4681-000.htm#en_us_publink100080217
If you had a nonbusiness credit card debt canceled, you may be able to exclude the canceled debt from income if the cancellation occurred in a title 11 bankruptcy case, if you were insolvent immediately before the cancellation, or if you were affected by the Midwestern disasters. You should read Bankruptcy, Insolvency, or Qualified Midwestern Disaster Area Indebtedness under Exclusions in Chapter 1 to see if you can exclude the canceled debt from income under one of those provisions. If you can exclude part or all of the canceled debt from income, you should also read Bankruptcy, Insolvency, and Qualified Midwestern Disaster Area Indebtedness under Reduction of Tax Attributes in Chapter 1.taxmap/pubs/p4681-000.htm#en_us_publink100080218
If you had a personal vehicle repossessed during the year, you will need to determine your gain or nondeductible loss on the repossession. This is explained in Chapter 2. If the lender also canceled all or part of the remaining amount on the loan, you may be able to exclude the canceled debt from income if the cancellation occurred in a title 11 bankruptcy case, if you were insolvent immediately before the cancellation, or if you were affected by the Midwestern disasters. You should read Bankruptcy, Insolvency, or Qualified Midwestern Disaster Area Indebtedness under Exclusions in Chapter 1 to see if you can exclude the canceled debt from income under one of those provisions. If you can exclude part or all of the canceled debt from income, you should also read Bankruptcy, Insolvency, and Qualified Midwestern Disaster Area Indebtedness under Reduction of Tax Attributes in Chapter 1.taxmap/pubs/p4681-000.htm#en_us_publink100080219
If a lender foreclosed on your principal residence during the year, you will need to determine your gain or nondeductible loss on the foreclosure or abandonment. Foreclosures are explained in Chapter 2 and abandonments are explained in Chapter 3. If the lender also canceled all or part of the remaining amount on the mortgage loan and you were personally liable for the debt, you should also read Qualified Principal Residence Indebtedness under Exclusions in Chapter 1 to see if you can exclude part or all of the canceled debt from income. Detailed examples 2 and 3 in Chapter 4 use filled-in forms to help explain these provisions.taxmap/pubs/p4681-000.htm#en_us_publink100080220
If a lender agrees to a mortgage loan modification (a "workout") that includes a reduction in the principal balance of the loan, you should read Qualified Principal Residence Indebtedness under Exclusions in Chapter 1 to see if you can exclude part or all of the canceled debt from income. If you can exclude part or all of the canceled debt from income, you should also read Qualified Principal Residence Indebtedness under Reduction of Tax Attributes in Chapter 1. Detailed example 1 in Chapter 4 uses filled-in forms to help explain the tax implications of a mortgage workout scenario.