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taxmap/pubs/p4681-000.htm#en_us_publink1000244053
Publication 4681

Canceled Debts, Foreclosures, Repossessions, and Abandonments

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(for Individuals)

What's New for 2010(p1)


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Midwestern disaster relief expired.(p1)

The exclusion for discharge of indebtedness of a qualified individual because of Midwestern disasters does not apply to discharges after 2009.
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Abandonment of property subject to debt.(p1)

The abandonment section has been revised to discuss the tax consequences of abandoning property subject to debt.

Reminder(p1)


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Photographs of missing children.(p1)

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.

taxmap/pubs/p4681-000.htm#TXMP1cb9ff62Introduction

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.
Note.This publication refers to the discharge of indebtedness or debt that is canceled or forgiven as "canceled debt."
Sometimes a debt, or part of a debt, that you do not have to pay is not considered canceled debt. These exceptions are discussed later under Exceptions. And sometimes a canceled debt may be excluded from your income. But, if you do exclude canceled debt from income, you may be required to reduce your "tax attributes." These exclusions and the reduction of tax attributes are discussed later under Exclusions.
Foreclosure and repossession are remedies that your lender may exercise if you fail to make payments on your loan and you have previously granted that lender a security interest in some of your property. These remedies allow the lender to seize or sell the property securing the loan. When your property is foreclosed upon or repossessed and sold, you are treated as having sold the property and you may recognize taxable gain. Whether you also recognize income from canceled debt depends in part on whether you are personally liable for the debt and whether the outstanding loan balance is more than the fair market value (FMV) of the property. Figuring your gain or loss and canceled debt arising from a foreclosure or repossession is discussed later under Foreclosures and Repossessions.
Generally, you abandon property when you voluntarily and permanently give up possession and use of property you own with the intention of ending your ownership but without passing it on to anyone else. Figuring your gain or loss and canceled debt arising from an abandonment is discussed later under Abandonments.
This publication also includes detailed examples with filled-in forms.
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Comments and suggestions.(p2)

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We welcome your comments about this publication and your suggestions for future editions.
You can write to us at the following address:

 
Internal Revenue Service  
Individual Forms and Publications Branch  
SE:W:CAR:MP:T:I  
1111 Constitution Ave. NW, IR-6526  
Washington, DC 20224


We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.
You can email us at *taxforms@irs.gov. (The asterisk must be included in the address.) Please put "Publications Comment" on the subject line. You can also send us comments from www.irs.gov/formspubs/; select "Comment on Tax Forms and Publications" under "Information about."
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Ordering forms and publications.(p2)
Visit www.irs.gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the address below and receive a response within 10 days after your request is received.

Internal Revenue Service 
1201 N. Mitsubishi Motorway 
Bloomington, IL 61705-6613


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Tax questions.(p2)
If you have a tax question, check the information available on IRS.gov or call 1-800-829-1040. We cannot answer tax questions sent to either of the above addresses.

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Useful items

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
 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)
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Common Situations Covered In This Publication(p2)

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The sections of this publication that 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 of common circumstances are provided in the following paragraphs 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.
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Nonbusiness credit card debt cancellation.(p2)

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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 or you were insolvent immediately before the cancellation. You should read Bankruptcy or Insolvency 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 and Insolvency under Reduction of Tax Attributes in chapter 1.
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Personal vehicle repossession.(p2)

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If you had a personal vehicle repossessed and disposed of by the lender during the year, you will need to determine your gain or nondeductible loss on the disposition. This is explained in chapter 2 . If the lender also canceled all or part of the remaining amount of the loan, you may be able to exclude the canceled debt from income if the cancellation occurred in a title 11 bankruptcy case or you were insolvent immediately before the cancellation. You should read Bankruptcy or Insolvency 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 and Insolvency under Reduction of Tax Attributes in chapter 1.
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Main home foreclosure or abandonment.(p2)

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If a lender foreclosed on your main home during the year, you will need to determine your gain or loss on the foreclosure. 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 Example 2 and Example 3 in chapter 4 use filled-in forms to help explain these provisions.
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Main home loan modification (workout agreement).(p2)

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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.