What is Cancellation of debt income?
In short
When a lender forgives or cancels a debt, the amount canceled is generally gross income to the borrower, unless an exclusion applies, such as bankruptcy or insolvency.
Key takeaways
- The insolvency exclusion is limited to the amount by which liabilities exceed assets just before the cancellation.
- Excluded amounts reduce tax attributes, such as net operating losses and the basis of property.
- Debt forgiven as a gift, or a price reduction by the seller of property, isn't income.
Where it's tested
REG: Individual Taxation: Gross Income — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Which of the following items is included in a taxpayer's federal gross income?