Form 1099-C, Cancellation of Debt. Box 6 of Form 1099-C has been expanded to identify the reason a creditor has filed this form. The reasons are identified by letter codes, “identifiable event codes,” explained under Form 1099-C, later. The use of these identifiable event codes is optional for 2012.

Future Developments. Information about any future developments affecting Publication 4681 (such as legislation enacted after we release it) will be posted at www.irs/pub4681.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that otherwise would be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

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.

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 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 whether the outstanding loan balance is more than the fair market value (FMV) of the property. Figuring your gain or loss and 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 canceled debt arising from an abandonment is discussed later under Abandonments .

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

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.