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If a lender discounts (reduces) the principal balance of a loan because you pay it off early, or agrees to a loan modification (a “workout”) that includes a reduction in the principal balance of a loan, the amount of the discount or the amount of principal reduction is canceled debt.
Publication 4681 explains the federal tax treatment of: Canceled debts. Foreclosures. Repossessions. Abandonments.
This publication explains the federal tax treat-ment of canceled debts, foreclosures, repos-sessions, and abandonments. Generally, if you owe a debt to someone else and they cancel or forgive that debt for less than its full amount, you are treated for income tax purposes as having income and may have to pay tax on this income. Note.
See IRS Publication 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals) for information regarding canceled debts, foreclosures, repossessions, and abandonments.
Publication 4681 guides individuals on the federal tax implications of canceled debts, foreclosures, repossessions, and abandoned property. It explains what constitutes income, potential exclusions, and how these events can impact your tax return.
related to Pub. 4681, such as legislation enacted after it was published, go to IRS.gov/ Pub4681. What’s New Discharge of qualified principal residence indebtedness before 2026. Qualified princi-pal residence indebtedness can be excluded from income for discharges before January 1, 2026. Department of the Treasury Internal Revenue Service
You’re insolvent when your total liabilities (what you owe) exceed (more than) the value of your total assets. You may use IRS Publication 4681, Insolvency Worksheet, to determine if you were insolvent just before the cancellation. Cancellation of qualified farm indebtedness; Cancellation of qualified real property business indebtedness; and
This publication generally refers to debt that is canceled, forgiven, or discharged for less than the full amount of the debt as “can-celed debt.”. Sometimes a debt, or part of a debt, that you don't have to pay isn't considered canceled debt. These exceptions are discussed later un-der Exceptions.
Use the insolvency worksheet (found in Pub 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals) (downloads as a PDF), to figure out whether this applies to you...
A creditor's cancellation of a debt as a gift to the debtor does not result in income to the debtor. This information is found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.