Is forgiven debt taxable income?

The general rule

The Canceled Debts section of Publication 525 states that if a debt you owe is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in income. A debt includes any indebtedness for which you are liable or which attaches to property you hold. A cancellation intended as a gift is not income. If the debt is a nonbusiness debt, report the amount on Schedule 1 (Form 1040), line 8c; for a business debt, use Schedule C, or Schedule F for farm debt if you are a farmer.

Form 1099-C

If a federal government agency, financial institution or credit union cancels a debt you owe, you may receive Form 1099-C. Box 2 shows the amount actually or deemed discharged; if you disagree, contact the creditor. When interest is forgiven and included in box 2, box 3 shows the interest. Whether you include the interest depends on whether it would be deductible if you paid it. For nondeductible interest such as a personal loan, include the box 2 amount. For deductible interest such as on a business loan, include the net amount: box 2 minus box 3. The calculator above applies that rule.

A discount offered by a financial institution for early payment of your mortgage is canceled debt that you include. If you included a canceled amount in income and later pay the debt, you may be able to claim a refund on Form 1040-X while the statute of limitations is open, generally three years after the due date of the original return.

Mortgages, foreclosures and stockholder debt

If you are personally liable for a mortgage (recourse) and are relieved of it when you dispose of the property, you may realize gain or loss up to the property’s FMV, and to the extent the discharge exceeds FMV it is income from discharge of indebtedness unless excluded. For nonrecourse debt, the relief is included in the amount you realize, and you may have a gain if that exceeds your adjusted basis. If a corporation cancels your debt to it and you are a stockholder, the amount is generally a dividend; if you cancel a debt the corporation owes you, you generally have no income.

Exceptions: debt that is not income

Do not include canceled debt in gross income when it is canceled in a Title 11 bankruptcy case; when you are insolvent (limited to the amount of insolvency); when it is qualified farm debt canceled by a qualified person; when it is qualified real property business debt; when the cancellation is a gift; or when it is qualified principal residence indebtedness (QPRI). Also excluded: debt whose payment would be deductible, for cash-method taxpayers, and a reduction in the price of property by the seller, which is a purchase price adjustment that reduces your basis. Publication 908 covers bankruptcy and insolvency.

Principal residence debt

QPRI is debt secured by your principal residence that you took out to buy, build or substantially improve it, up to the cost plus improvements. You must reduce the home’s basis by the excluded amount and file Form 982. The 2025 edition says the exclusion applies to debt discharged after 2006 and, in most cases, before 2026, with a $750,000 maximum ($375,000 if married filing separately). Example 24: a joint filer’s home is secured by $900,000 of debt, $700,000 of it QPRI; the home sells for $600,000 and $300,000 is canceled. Only $100,000 is excluded, because $300,000 minus the $200,000 of nonqualified debt leaves $100,000. Check Publication 4681 or the current instructions for periods after 2025.

Student loans and PPP loans

Generally, if you must repay a student loan and it is canceled, or repaid by someone else, you include the amount. The publication lists exclusions for cancellation after meeting work requirements, for certain discharges after December 31, 2020 and before January 1, 2026 (the special rule for 2021 through 2025), and for certain loan repayment assistance such as the National Health Service Corps program. Cancellation does not qualify if it is for services performed for the lender or its funding organization. PPP loan forgiveness is tax-exempt income, though certain information must be reported (Revenue Procedure 2021-48). See the student loan forgiveness tax calculator for the loan-specific rules.

Worked example

A lender cancels $9,000 of a personal credit card balance, of which $1,000 is interest. Form 1099-C shows $9,000 in box 2 and $1,000 in box 3. Interest on a personal loan is not deductible, so you include the full $9,000 on Schedule 1, line 8c, unless you were insolvent or qualify for another exclusion. If the same amounts came from a business loan with deductible interest, you would include $8,000. This page covers the Canceled Debts section of Publication 525 (2025).

Related Publication 525 topics

More from the same IRS publication: Is bartering taxable income?, Is life insurance payout taxable?, Are royalties taxable income?.

Sources

• IRS Publication 525, Taxable and Nontaxable Income (2025): the “Canceled Debts” section and the sections it cross-references. Read November 2, 2026.

Edition read: Publication 525 (2025), for use in preparing 2025 returns. Dollar limits and dates in this publication are for 2025; check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it.