Cancellation of Debt Insolvency Worksheet

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This tax worksheet calculates a taxpayer’s insolvency for purposes of excluding cancellation of debt income under IRC Sec. 108.

A debt includes any indebtedness whether a taxpayer is personally liable or liable only to the extent of the property securing the debt. Cancellation of all or part of a debt that is secured by property may occur because of a foreclosure, a repossession, a voluntary return of the property to the lender, abandonment of the property, or a principal residence loan modification.

In general, if a taxpayer debt is canceled, forgiven, or discharged the taxpayer will receive a Form 1099-C, Cancellation of Debt, and must include the canceled amount in gross income unless the taxpayer meets an exclusion or exception.

Debt Cancellations or Reductions that Qualify for EXCEPTION to Inclusion in Gross Income:

  • Amounts specifically excluded from income by law such as gifts, bequests, devises or inheritances
  • Cancellation of certain qualified student loans
  • Canceled debt, that if it were paid by a cash basis taxpayer, would be deductible
  • A qualified purchase price reduction given by a seller
  • Any Pay-for-Performance Success Payments that reduce the principal balance of your home mortgage under the Home Affordable Modification Program

Canceled Debt that Qualifies for EXCLUSION from Gross Income:

  • Debt canceled in a Title 11 bankruptcy case
  • Debt canceled during insolvency
  • Cancellation of qualified farm indebtedness
  • Cancellation of qualified real property business indebtedness
  • Cancellation of qualified principal residence indebtedness

See Publication 4681 for further details.

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