Forgiven debt may be free from income tax
Charlene M. Ives, CPA, PC
Mortgage interest
Through 12/31/2013, debt that can be excluded from income can include debt up to $2 million that a loan was taken out to acquire, build or substantially improve a principal residence. Forgiveness of debt on vacation homes, second homes and investment property does not qualify. Debt forgiven on a cash-out refinance or home equity loan must be apportioned between the amounts used for home acquisition, construction or improvement and amounts used for other purposes such as tuition, travel or repayment of other debts.
Debt discharged through bankruptcy is not considered taxable income.
If you are insolvent when the debt is canceled, some or all the debt may not be taxable. You are insolvent when your total countable debts are more than the value of your total assets.
Qualified real property indebtedness can be excluded from taxable income, provided that the property was obtained in connection to a trade or busness, amoung other requirements (rental properties may qualify depending on the extent of the taxpayer\'s involvement in the rental activity).
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