In today’s troubled economy it is more and more common for common folks to negotiate mortgages and end up with better terms. In some extreme situations the bank may actually cancel some, or rarely, all of the principal balance of an outstanding loan. If you find yourself int his position be sure you know what the tax consequences are!

The general rule is; cancellation of debt income is taxable as ordinary income. Internal Revenue Code section 61 provides that gross income means all income regardless of the source from which it is derived. Section 61(a)(12) specifically includes “income from discharge of indebtedness” as an item of gross income.

Cancellation of debt (COD) income can arise in a number of areas, such as: Click to continue »