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Taxes and Debt Forgiveness
Cancellation of debt results in tax liability unless you qualify for an exception:
  • Insolvency (on the date of forgiveness your total debts exceed your total assets)
  • Bankruptcy
  • Home Mortgage Forgiveness Debt Relief Act of 2007 applies to qualifying mortgage debt forgiveness from 2007 to 2013
  • Certain farming debts
  • Non-recourse loans

The debtor is required to send you a 1099 C "Cancellation of Debt” on any debt $600 or more that is forgiven.

Legally you are to report debt forgiven for amounts less than $600.

All debt forgiven must be reported using Form 982, regardless of whether it is taxable or not. Attach this form to your tax return. See IRS Pub 4681 for more information. 

Although you may incur taxes, this will be a percent of the amount forgiven. Dollar for dollar it is in your best interest to negotiate lower payoffs.

 

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