Question

Which of the following would result in the cancellation of debt being included in income? The canceled debt was for the taxpayer's primary residence. If the debtor was insolvent by more than the amount of the canceled debt. If the debtor was solvent at the time of debt cancellation. If the debt was canceled through a Chapter 7 bankruptcy.

Answer 1

The Answer is If the debtor was solvent at the time of debt cancellation.

As per the General Rule In case of any Cancellation of debt , the amount cancelled will be included in the Taxable income.

However it has certain exceptions which includes below-

• Debt canceled in a bankruptcy proceeding
• Debt canceled when the person is insolvent, and
• Debt that qualifies under the Mortgage Forgiveness Debt Relief Act

So the income will be included if the debtor is solvent, it is also required that creditor must send the form 1099-c for the cancellation of the debt