Usually when debt is forgiven, it’s a bittersweet ending. Your debt is gone but you will have to pay taxes on it as if it were income. However, IRS Form 982 is used to exclude debt forgiveness from your taxable income. To see if your discharge of indebtedness qualifies as tax-free, read on…
Types of Discharge of Indebtedness That Qualify for Tax-Free Status
If your debt forgiveness was part of a mortgage on your principal residence after 2006. Also, if you restructured your mortgage (refinancing) then you can use IRS Form 982 to exclude that amount of your debt that was reduced, from income. This is part of the Mortgage Forgiveness Debt Relief Act of 2007.
If you file for bankruptcy then the loans which you no longer have to pay are actually not considered income so use IRS Form 982 to exclude this from your income tax.
3. Farm Debts
If you own & operate a farm and more than 50% of your income comes from that farm for at least the past three years, any loan you took out and which was subsequently cancelled is not included in income tax. Therefore, submit IRS Form 982 to exclude it from taxation.
Insolvency is one step worse than bankruptcy. When your debts are more than your assets, you are insolvent. If you get cancelled debt while you are insolvent then use IRS Form 982 to exclude those cancelled debts from taxable income.
5. Non-Recourse Loans
If you took out a loan and the only collateral is the thing you bought with the loan, it’s called a non-recourse loan. If that loan is forgiven, then use IRS Form 982 to exclude it from debt.
How About Discharge of Business Debt? Can I Use IRS Form 982 for That?
Well yes, if you were personally liable for some business debt, it’s all the same as far as IRS Form 982 goes. Business property foreclosure would be reported here as well.
You can download IRS Form 982 here on the IRS Website.