The short answer
When a lender cancels, forgives, or settles a debt for less than you owe, the canceled amount is generally taxable income. You may receive a Form 1099-C. But several exceptions and exclusions can make some or all of it nontaxable — most often insolvency. Two exclusions narrowed after 2025: the exclusion for forgiven main-home mortgage debt and the broad exclusion for student loan discharges.
Form 1099-C and where to report
- Who sends it: financial institutions, credit unions, federal agencies, and certain other lenders file Form 1099-C when they cancel $600 or more of debt and an identifiable event has occurred.
- Box 6 shows an identifiable event code explaining why the form was issued.
- Where to report taxable canceled debt: Schedule 1 (Form 1040), line 8c for nonbusiness debt; Schedule C for a sole proprietorship; Schedule E for rental real estate.
- A form does not mean it is all taxable. The amount on Form 1099-C is ordinary income only if no exception or exclusion applies; you may be able to exclude part or all of it.
- No form does not mean no income. Taxable canceled debt must be reported even without a 1099-C.
Exceptions: not income at all
- Gifts, bequests, devises, and inheritances.
- Deductible debt: for cash-method taxpayers, if paying the debt would have been deductible.
- Price reduced after purchase: the seller reduces debt you owe for property you bought from them, while you are not insolvent or in bankruptcy; you reduce your basis in the property instead.
- Certain student loans — see below.
Exclusions: claimed on Form 982
| Exclusion | Key rule |
|---|---|
| Bankruptcy | Debt canceled in a title 11 bankruptcy case is excluded |
| Insolvency | Excluded to the extent your total liabilities exceeded the fair market value of your total assets immediately before the cancellation |
| Qualified principal residence indebtedness | Mortgage debt on your main home; up to $750,000 ($375,000 married filing separately); for discharges before 2026 or under a written arrangement entered into before 2026 |
| Qualified farm indebtedness | Certain farm debt |
| Qualified real property business indebtedness | Debt secured by real property used in a trade or business, if you elect it |
Excluded amounts generally reduce tax attributes, such as the basis of property you keep. Bankruptcy applies first; if you were insolvent, you can choose the insolvency exclusion instead of the principal residence exclusion.
Main-home mortgage debt: the 2026 change
- What qualifies: debt to buy, build, or substantially improve your main home, secured by that home, plus a refinance up to the old mortgage balance.
- Timing: the Form 982 instructions say the exclusion applies to debt discharged before January 1, 2026, or discharged under an arrangement entered into and evidenced in writing before January 1, 2026.
- Not covered: cancellation for services performed for the lender, or for any reason not directly related to a decline in the home's value or your financial condition.
- Basis: if you keep the home, you reduce its basis by the excluded amount.
Student loans: each exclusion separately
| Exclusion | Status after 2025 |
|---|---|
| Broad exclusion for discharges from 2021 through 2025 (postsecondary education loans, private education loans, and certain others) | Ends for discharges after December 31, 2025 |
| Cancellation for working for a certain period, in certain professions, for a broad class of employers, on a qualifying loan | Listed in Publication 4681 (2025) without an end date |
| Repayment assistance from the National Health Service Corps, state programs under the Public Health Service Act, and certain state health-profession programs | Listed in Publication 4681 (2025) without an end date |
| Discharge because of the student's death or total and permanent disability | Continues; Publication 4681 (2025) says that for discharges after 2025 you must include an SSN valid for employment, issued before the return due date — a requirement it states only for this exclusion |
The work-requirement exclusion has its own conditions: the loan must come from a qualified lender for attendance at an eligible educational organization, and cancellation for services performed for the school or a tax-exempt lender itself does not qualify. Nontaxable student loan discharges after 2020 are not reported on Form 1099-C.
Foreclosures, repossessions, and abandonments
- Recourse debt (you are personally liable): you may have both a gain or loss on the property and separate canceled-debt income if the debt exceeds the property's value.
- Nonrecourse debt: the full debt is treated as the amount realized on disposing of the property — a gain or loss, not canceled-debt income.
- Form 1099-A may report an acquisition or abandonment; a lender that cancels $600 or more in the same year may file only Form 1099-C.
Example
In 2025, Leo's credit card company accepted $4,000 to settle a $10,000 balance and sent him a Form 1099-C for $6,000. Immediately before the settlement, his total liabilities were $50,000 and his total assets were worth $47,000, so he was insolvent by $3,000. He can exclude $3,000 on Form 982 and reports the other $3,000 on Schedule 1, line 8c. The figures are illustrative; Publication 4681 has an insolvency worksheet.
Common mistakes
- Ignoring a Form 1099-C — the IRS receives a copy.
- Missing the insolvency exclusion because you did not add up all assets and liabilities.
- Claiming the principal residence exclusion for a 2026 discharge without a written arrangement entered into before 2026.
- Assuming every student loan discharge is taxable after 2025, or that every one is tax-free.
- Forgetting Form 982 or the required basis reduction.
- Confusing a home sale gain with canceled mortgage debt — they are separate items.
Bankruptcy, business or rental debt, partial insolvency, and attribute reduction can be complex. If a large amount is involved, have a tax professional review your Form 982.