Question

income may be recognized from cancellation of debt in which instance?

a) the debt canceled was intended as a gift

b) the debt was canceled by a purchase price reduction

c) the debt would have been deductible by the taxpayer if paid

d) debt was canceled from the mortgage on a taxpayer's second home

Answer 1

Answer

d) debt was canceled from the mortgage on a taxpayer's second home.

Explanation : As per IRS guideline if a taxpayer 's loan is discharged (in full or partial) then generally the taxpayer should incuded such amount as his income, however there is a special exclusion ie if the discharged debt was the taxpayer 's loan for main home then such discharged or canceled debt may not be included in taxpayer's income.

The special exclusion does not applly to taxpayer's second home. Thus if canceled debt was from the mortgage on a taxpayer's second home such debt may be recognized as income