Publication 4681 - Introductory Material


Reminder

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Introduction

This publication explains the federal tax treatment of canceled debts, foreclosures, repossessions, 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.

This publication generally refers to debt that is canceled, forgiven, or discharged for less than the full amount of the debt as “canceled debt.

Sometimes a debt, or part of a debt, that you do not have to pay is not considered canceled debt. These exceptions are discussed later under Exceptions .

Sometimes a canceled debt may be excluded from your income. But if you do exclude canceled debt from income, you may be required to reduce your “tax attributes.” These exclusions and the reduction of tax attributes associated with them are discussed later under Exclusions .

Foreclosure and repossession are remedies that your lender may exercise if you fail to make payments on your loan and you have previously granted that lender a mortgage or other security interest in some of your property. These remedies allow the lender to seize or sell the property securing the loan. When your property is foreclosed upon or repossessed and sold, you are treated as having sold the property and you may recognize taxable gain. Whether you also recognize income from canceled debt depends in part on whether you are personally liable for the debt and in part on whether the outstanding loan balance is more than the fair market value (FMV) of the property. Figuring your gain or loss and income from canceled debt arising from a foreclosure or repossession is discussed later under Foreclosures and Repossessions .

Generally, you abandon property when you voluntarily and permanently give up possession and use of property you own with the intention of ending your ownership but without passing it on to anyone else. Figuring your gain or loss and income from canceled debt arising from an abandonment is discussed later under Abandonments .

This publication also includes detailed examples with filled-in forms.

Comments and suggestions.    We welcome your comments about this publication and your suggestions for future editions.

  You can write to us at the following address:

Internal Revenue Service 
Tax Forms and Publications Division 
1111 Constitution Ave. NW, IR-6526 
Washington, DC 20224

  We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

  You can send your comments from www.irs.gov/formspubs. Click on “More Information” and then on “Comment on Tax Forms and Publications”.

  Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products.

Ordering forms and publications.    Visit www.irs.gov/formspubs to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received.

Internal Revenue Service 
1201 N. Mitsubishi Motorway 
Bloomington, IL 61705-6613

Tax questions.    If you have a tax question, check the information available on IRS.gov or call 1-800-829-1040. We cannot answer tax questions sent to either of the above addresses.

Useful Items - You may want to see:

Publication

  • 225 Farmer's Tax Guide

  • 334 Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ)

  • 523 Selling Your Home

  • 525 Taxable and Nontaxable Income

  • 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts

  • 542 Corporations

  • 544 Sales and Other Dispositions of Assets

  • 551 Basis of Assets

  • 908 Bankruptcy Tax Guide

Form (and Instructions)

  • 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)

  • 1099-C Cancellation of Debt

  • 1099-DIV Dividends and Distributions

  • 3800 General Business Credit

Common Situations Covered In This Publication

The sections of this publication that apply to you depend on the type of debt canceled, the tax attributes you have, and whether or not you continue to own the property that was subject to the debt. Some examples of common circumstances are provided in the following paragraphs to help guide you through this publication. These examples do not cover every situation but are intended to provide general guidance for the most common situations.

Nonbusiness credit card debt cancellation.    If you had a nonbusiness credit card debt canceled, you may be able to exclude the canceled debt from income if the cancellation occurred in a title 11 bankruptcy case or you were insolvent immediately before the cancellation. You should read Bankruptcy or Insolvency under Exclusions in chapter 1 to see if you can exclude the canceled debt from income under one of those provisions. If you can exclude part or all of the canceled debt from income, you should also read Bankruptcy and Insolvency under Reduction of Tax Attributes in chapter 1.

Personal vehicle repossession.    If you had a personal vehicle repossessed and disposed of by the lender during the year, you will need to determine your gain or nondeductible loss on the disposition. This is explained in chapter 2 . If the lender also canceled all or part of the remaining amount of the loan, you may be able to exclude the canceled debt from income if the cancellation occurred in a title 11 bankruptcy case or you were insolvent immediately before the cancellation. You should read Bankruptcy or Insolvency under Exclusions in chapter 1 to see if you can exclude the canceled debt from income under one of those provisions. If you can exclude part or all of the canceled debt from income, you should also read Bankruptcy and Insolvency under Reduction of Tax Attributes in chapter 1.

Main home foreclosure or abandonment.    If a lender foreclosed on your main home during the year, you will need to determine your gain or loss on the foreclosure. Foreclosures are explained in chapter 2 and abandonments are explained in chapter 3. If the lender also canceled all or part of the remaining amount on the mortgage loan and you were personally liable for the debt, you should also read Qualified Principal Residence Indebtedness under Exclusions in chapter 1 to see if you can exclude part or all of the canceled debt from income. Detailed Example 2 and Example 3 in chapter 4 use filled-in forms to help explain these provisions.

Main home loan modification (workout agreement).    If a lender agrees to a mortgage loan modification (a “workout”) that includes a reduction in the principal balance of the loan, you should read Qualified Principal Residence Indebtedness under Exclusions in chapter 1 to see if you can exclude part or all of the canceled debt from income. If you can exclude part or all of the canceled debt from income, you should also read Qualified Principal Residence Indebtedness under Reduction of Tax Attributes in chapter 1. Detailed Example 1 in chapter 4 uses filled-in forms to help explain the tax implications of a mortgage workout scenario.


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