Generally, when a debt is forgiven by a creditor, the amount of the debt forgiveness is taxable income to the debtor. However, there are exceptions and exclusions that may keep an individual from having to include debt forgiveness in income.
If the debt is canceled by a private lender and the cancelation is intended as a gift, there is no income to be reported. While it is not income, if the lender forgives more than $14,000 in a year, the canceled debet may create a taxable gift for the lender.
The following debt canceled by lenders are excludes from income that are discharged in:
C. Qualified farm indebtedness
D. Qualified real property business indebtedness
E. Qualified Principal residence indebtedness
For more information on Reporting Income From Debt Cancelation, contact Robert Burch at (773) 779-4447