Exceptions to Cancellation of Debt

There are quite a few exceptions when it comes to the cancellation of debt income. Defined by the IRS, the following are not considered cancellation of debt income:

Debts canceled as gifts or inheritance

Some qualified student loans that meet specific criteria

Other education loans or relief programs that help provide health services

Canceled debt that would be deductible if an individual as a cash basis taxpayer, paid it

A qualified purchase price reduction on a property provided by the seller

Pay-For-Performance Success payments that reduce the principal balance of a mortgage under the Home Affordable Modification Program

Amounts of student loans discharged upon the death or disability of the student

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The following exclusions are considered cancellation of debt income but the IRS excludes them from being reported as income.

Canceled debt from a Title 11 bankruptcy case

Canceled debt to the extent insolvent

Cancellation of qualified farm indebtedness

Cancellation of qualified real property business indebtedness

Cancellation of qualified principal residence indebtedness