According to IRS Publication 4681:
If you had debt cancelled and are no longer obligated to repay the debt, you generally must include the amount of cancelled debt in your income. However, if the discharge of indebtedness occurred while you were insolvent, the debt generally does not have to be added to your return as income. However, this exclusion does not apply to a discharge of indebtedness that occurred in a title 11 case or to any discharge of qualified principal residence indebtedness unless you elect to have the insolvency exclusion apply instead of the exclusion for qualified principal residence indebtedness.
What does it mean to be insolvent?
You were insolvent if your liabilities (the total amount of all debts) were more than the fair market value (FMV) of all of your assets immediately before the discharge. For more details on what it means to be insolvent, please reference IRS Publication 908, Bankruptcy Tax Guide.
What amount of cancelled debt can be excluded from income?
You can only exclude the amount of debt equal to the extent that you were insolvent.
To locate Form 982 within our program go to:
- Other Income
- Less Common Income
- Cancellation of Debt
- Exclusions (Form 982)
For more information, please review Publication 4681.