by Cindy Toran, Tax Manager
How does cancellation of debt become tax free? Is Federal versus Massachusetts different?
Generally debt forgiveness for a borrower who is personally liable on a loan is taxable income unless one of the following exceptions applies per Federal tax law:
- Occurs under Title 11 bankruptcy
- Occurs when the taxpayer is insolvent (Debts greater than Assets)
- Is qualified farm indebtedness
- Is qualified real property business indebtedness (other than C-corporations)
- Is qualified principal residence acquisition debt (up to $2M for MFJ) – expired December 31, 2013
Massachusetts, however, did not adopt the exclusion for mortgage forgiveness on principal residence. Thus, for home mortgage cancellation of debt only one of the first 4 exceptions listed above will prevent the debt forgiveness from being subject to MA income tax.