Q:  My house went into foreclosure a while ago and the bank notified me that the transaction closed.  I then received a Form 1099-C, but am not sure what this means.  Will I have to pay taxes on the amount that was forgiven?

 A:  Very good question and the short answer is that it depends.  Generally speaking, when a debt that you are liable for is canceled, forgiven, or discharged, you will receive a Form 1099-C (Cancellation of Debt) and must include the canceled amount in gross income.  If, however, the creditor is continuing to try to collect the debt, or you meet an exclusion or exception, then you do not have cancellation of debt income.

Cancellation of debt, whether it be partially or totally, 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. You must report any taxable amount of a cancelled debt for which you are personally liable, as ordinary income from the cancellation of debt.  This is done via your Form 1040 and must be reported whether or not you receive a Form 1099-C.  But what about those exclusions and exceptions mentioned above?

Canceled Debt that meets the requirements for any of the following exceptions or exclusions are not considered taxable:


  • Amounts specifically excluded from income by law such as gifts or bequests
  • Cancellation of certain qualified student loans
  • Canceled debt that if paid by a cash basis taxpayer is otherwise deductible
  • A qualified purchase price reduction given by a seller


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

The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence.  This exclusion for “qualified principal residence indebtedness,” provides canceled debt tax relief for debt forgiven during calendar years 2007 through 2012.  It allows taxpayers to exclude up to $2,000,000 ($1,000,000 if married filing separately) of “qualified principal residence indebtedness” which is: 

  1. Any mortgage taken out to buy, build or substantially improve your main home
  2. Is secured by your main home
  3. Any debt secured by your main home that you took out to buy, build or substantially improve your main home (but only up to the amount of the old mortgage principal just before refinancing).

Generally, if you exclude canceled debt from income under one of the exclusions listed above, you must also reduce your tax attributes in the asset by the amount excluded. You must file Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) to report the exclusion and the corresponding reduction of certain tax attributes.

Point of Caution 

If your debt is secured by property AND that property is taken by the lender in full or partial satisfaction of your debt, you will be treated as having sold that property.  This may result in a reportable gain or loss. The gain or loss on such a “deemed sale” of your property is a separate issue from whether any canceled debt also associated with that same property is includable in gross income.  Make sure to discuss this potential transaction with your tax professional or see IRS Publication 544 (Sales and Other Dispositions of Assets), for detailed information on reporting the gain or loss.