IRS Publication 4681: Canceled Debts, Foreclosures,
Repossessions, and Abandonments (For Individuals)
For use in preparing 2008 Returns
This publication explains the federal tax treatment of
canceled debts, foreclosures, repossessions, and
Generally, if you owe a debt to someone else and they cancel
or forgive that debt, you are treated for income tax
purposes as having income and may have to pay tax on this
income. This publication refers to this as "canceled debt"
whether it is canceled or forgiven. However, under certain
circumstances, you may not have to include canceled debt
from income you may also be required to reduce "tax
attributes." Reduction of tax attributes is discussed in
more detail later in this publication.
If you have property that is security for a debt and that
property is taken by the lender in full or partial
satisfaction of your debt, you will be treated as having
sold that property and may have gain or loss as a result.
For this purpose, it does not matter whether the lender took
the property through foreclosure, repossession, a voluntary
conveyance by you to the lender, or your abandonment of the
property. If the lender cancels debt in excess of the fair
market value (FMV) of the property taken by the lender, the
excess of the canceled debt over the FMV of the property may
have to be treated by you as ordinary income from the
cancellation of debt in addition to any taxable gain that
you may have had from being treated as having sold the
If you are treated as having sold the property, any gain you
have will generally have to be reported on your income tax
return. IF you have a loss, you may be entitled to deduct
the loss if the property that was returned to the lender is
business or investment property, but not if it is personal
use property, such as your residence.
This publication discusses the general rule requiring
canceled debt to be included in income, exceptions to the
general rule, exclusions from the general rule, and the
ordering rules for reduction of tax attributes by reason of
the exclusion of canceled debt from income. This publication
also discusses the tax treatment resulting from
foreclosures, repossessions, and abandonments and provides
detailed examples with filled-in forms.