Cancellation of Debt Exceptions

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I represent taxpayers in Gainesville and the state of Florida who have tax issues with the IRS and Florida Department of Revenue. Cancellation of Debt produces taxable income unless that income is can be recharacterized or is one of the exceptions. See the previous post explaining the reporting process for Cancelled Debt

Canceled debt that’s not included in income because we recharacterized it as something else include:

  • Debt that’s canceled as a gift, bequest, devise, or inheritance
  • Certain cancellations of student loans
  • Interest that was included with the principal that was written off
  • A qualified purchase price reduction given by a seller

The Canceled Debt exclusions include:

  • Debt canceled in a Title 11 bankruptcy case
  • Debt canceled during insolvency (your total liabilities exceed the value of your total assets - see IRS Publication 468)
  • Cancellation of qualified farm indebtedness
  • Cancellation of qualified real property business indebtedness
  • Qualified principal home indebtedness up to $2 million for married filing joint that was cancelled prior to 12/31/17

Cancelled Debt exclusions are not a complete freebie. You must reduce certain “tax attributes” by the amount of cancellation, but not below zero. Tax Attributes is a complicated subject and best method for determining how to calculate the reductions is to use Part II of Form 982. Basically, you are reducing future tax benefits such as depreciable basis, Net Operating Losses, and various credit carryforwards.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email


Jim Payne, CPA


Gainesville, FL

Cell (352) 317-5692

Office (352) 376-9401

Fax (352) 376-9440


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Sham Reddy CRS
H E R Realty, Dayton, OH - Dayton, OH

Great blog, thanks for sharing!

Cancellation of Debt produces taxable income unless that income is can be recharacterized or is one of the exceptions.

Sep 30, 2019 04:32 AM #1
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Jim Payne, CPA

CPA firm practicing in the area of IRS Collections
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