Will I Be Taxed on a Cancelled Debt?

Full question:

Due to loss of income my wife and I had to give up our home of six years. We recently received a statement from the FinanceCompany showing a debt cancellation of $173,060.The home had dropped in valuefrom $303,060., to 130.00.Even though we received no benefit from this forclosurewill I be taxed or penalizedon this loss.

Category: Taxes
Date: 04/07/2025
State: California

Answer:

Imputed income is also a term the Internal Revenue Service (IRS) applies when they feel that the value of a benefit or service should be considered as income for the purposes of calculating your federal taxes. For example, if you have a contract with the other owners requiring them to pay a share of the expenses and you forgive their indebtedness, it may be counted as imputed income on the other owners' taxes as a cancelled debt. The answer will depend on all the circumstances involved. I suggest you consult your accountant who can review all the facts and documents in your situation.

Please see the information at the following link:

http://www.irs.gov/taxtopics/tc431.html

This content is for informational purposes only and is not legal advice. Legal statutes mentioned reflect the law at the time the content was written and may no longer be current. Always verify the latest version of the law before relying on it.

FAQs

What are the IRS rules for surviving spouse after death?

The IRS allows a surviving spouse to file jointly with their deceased partner for the year of death, which can provide tax benefits. After that, the surviving spouse may qualify for the qualifying widow(er) status for up to two years, allowing them to use the joint tax rates. It's important to consider any inherited assets and potential tax implications. Consulting a tax professional can help navigate these rules effectively.

Does a cancellation of debt count as income?

Yes, a cancellation of debt can be considered taxable income by the IRS, even if you did not receive a benefit from it. This is referred to as imputed income. However, there are exceptions, such as insolvency or certain types of forgiven debt, which may not be taxable. It's advisable to consult a tax professional to understand your specific situation.

Is cancellation of debt taxable for deceased spouse?

Yes, if a debt is canceled after a spouse's death, it may still be considered taxable income to the estate or the surviving spouse, depending on the circumstances. However, certain exemptions may apply, such as insolvency or specific types of forgiven debts. It's best to consult a tax advisor to clarify the implications for your situation.

What is the IRS form for forgiveness of debt?

The IRS Form 982, titled 'Reduction of Tax Attributes Due to Discharge of Indebtedness,' is used to report the cancellation of debt. This form helps taxpayers claim any exclusions that may apply, such as insolvency or qualified principal residence indebtedness. It's important to fill out this form accurately to avoid potential tax liabilities.

What is the Home Mortgage Forgiveness Debt Relief Act?

The Home Mortgage Forgiveness Debt Relief Act allows taxpayers to exclude income from the cancellation of debt on their principal residence, under certain conditions. This act is particularly relevant for homeowners who have had mortgage debt forgiven due to foreclosure or loan modification. However, this relief is not permanent and has specific eligibility criteria, so consulting a tax professional is recommended.