If a debt is canceled or forgiven, other than as a gift or bequest, the debtor generally must include the canceled amount in gross income for tax purposes. A debt includes any indebtedness for which the debtor is liable or which attaches to property the debtor holds.
Exceptions and Exclusions
There are several exceptions and exclusions from the inclusion of canceled debt in income. The exceptions include:
- The cancellation of a student loan for a student required to work for certain employers. See Cancellation of student loan in Publication 525, Taxable and Nontaxable Income.
- The cancellation of debt that would have been deductible if paid. 3) The reduction of a debt by the seller of property if the debt arose from the purchase of the property.
The exclusions are discussed next.