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Published:   |   Last Updated: November 1, 2023

I Have a Cancellation of Debt or Form 1099-C

If you owe a debt to someone who cancels or forgives all or some of the debt, you’re treated as having received income for income tax purposes, and you may have to pay tax on this income.

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What do I need to know?

A debt includes debt you’re fully liable for like credit card debt and debt that you’re liable for only up to the value of property securing the debt such as a mortgage debt secured by a home in some states.

A debt secured by property may be considered canceled because of a foreclosure, a repossession, you voluntarily returned the property to the lender, you abandoned the property, or because of a loan modification.

The amount of canceled debt is included in your income unless an exception or exclusion applies. This concept is explained in detail in the What should I do? section below.

In general, if you’re liable for tax because a debt was canceled, forgiven, or discharged, you’ll receive a Form 1099-C, Cancellation of Debt, from the lender or the person who forgave the debt.

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    You may receive an IRS Form 1099-C while the creditor is still trying to collect the debt. If so, the creditor may not have canceled it. Contact the creditor and verify your situation.

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    You must report the canceled debt (one that doesn’t qualify for an exception or exclusion from gross income) on your income tax return whether you receive an IRS Form 1099-C.


Cancellation of Debt is a complex topic. You may consider consulting with a tax professional if you have additional questions. Low Income Taxpayer Clinics, which do not prepare tax returns unless you have a controversy with the IRS, may be able to help qualifying taxpayers with this issue.



What should I do?

Assess the debt

Review any IRS Form 1099-C, Cancellation of Debt, you received for the year. If you believe the information on the form is wrong, contact the lender to correct it. If the payer (lender) won’t correct the IRS Form 1099-C document, report the amount on your tax return but include an explanation as to why the payer’s information is incorrect.

List any debts canceled during the year for which you didn’t receive an IRS Form 1099-C.

Determine whether the cancellation of debt is taxable income or if it qualifies for an exception or exclusion, which means it isn’t taxable income.

  • Even if a canceled debt isn’t taxable income, you may need to complete IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), see below.

Exceptions and exclusions

There are several EXCEPTIONS to the requirement that you include canceled debt in income. Canceled debt that’s not included in income can be:

  • Debt that’s canceled as a gift, bequest, devise, or inheritance;
  • Certain cancellations of student loans;
  • A payment of the debt that would have been a deductible expense for the tax year in which it was paid; and
    • For example:  Your mortgage company cancels the mortgage on your home. Part of the forgiven debt is interest that you could have deducted on your tax return if you’d paid it. The amount of interest forgiven isn’t included in income.
  • A qualified purchase price reduction given by a seller.

Canceled debts that qualify for EXCLUSION from gross income are:

  • Debt canceled in a Title 11 bankruptcy case;
  • Debt canceled during insolvency;
    • 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
  • Cancellation of qualified principal home indebtedness.
    • This exclusion allows taxpayers to exclude up to $750,000 ($375,000 if married filing separately) of canceled “qualified principal residence indebtedness”.
    • This exclusion does NOT apply if the cancellation was for services performed for the lender or on account of any other factor not directly related to a decline in the value of  your home or to your financial condition.
    • If only a part of a loan is qualified principal residence indebtedness, the exclusion applies only to the extent the amount canceled is more than the amount of the loan (immediately before the cancellation) that isn’t qualified principal residence indebtedness. The remaining part of the loan may qualify for another exclusion.

Filing your tax return

You must report any taxable amount of a canceled debt as ordinary income on IRS Form 1040 or IRS Form 1040NR tax returns.

To report the amount qualifying for exclusion and other information that may affect your tax liability in future years, you must file IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).

  • For example: For cancellation of debt on your qualified principal residence that you exclude from income, you must lower your basis in the residence. This may increase the amount of gain you have if you later sell the residence.


How will this affect me?

Different types of debt may have different tax treatments.

For example: If your debt is secured by property and the lender takes the property to fully or partially satisfy your debt, you’re treated as having “sold” that property and may have a taxable gain or loss. The gain or loss on such a “sale” is separate from any cancellation of debt income that you need to include on your return.

If you don’t report the taxable amount of the canceled debt, the IRS may send you a notice proposing to assess additional tax and may audit your tax return. In addition, the IRS may assess additional tax, penalties and interest.


Wait, I still need help.

The Taxpayer Advocate Service is an independent organization within the IRS that helps taxpayers and protects taxpayers’ rights. We can offer you help if your tax problem is causing a financial difficulty, you’ve tried and been unable to resolve your issue with the IRS, or you believe an IRS system, process, or procedure just isn’t working as it should. If you qualify for our assistance, which is always free, we will do everything possible to help you.

Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778.

Low Income Taxpayer Clinics (LITCs) are independent from the IRS and TAS. LITCs represent individuals whose income is below a certain level and who need to resolve tax problems with the IRS. LITCs can represent taxpayers in audits, appeals, and tax collection disputes before the IRS and in court. In addition, LITCs can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee. For more information or to find an LITC near you, see the LITC page on the TAS website or Publication 4134, Low Income Taxpayer Clinic List.

I filed for bankruptcy. What happens to debt amounts then?

Generally, if debt is canceled under the U.S. bankruptcy laws it is excludable from taxable income, but some exceptions and requirements apply.

See Publication 908, Bankruptcy Tax Guide, for information on taxable items under bankruptcy.


Did you know there is a Taxpayer Bill of Rights?

The taxpayer Bill of Rights is grouped into 10 easy to understand categories outlining the taxpayer rights and protections embedded in the tax code.

It is also what guides the advocacy work we do for taxpayers.

Read more about your rights