Tag Archives: cancelled

How Cancellation of Debt Becomes Tax Free – Federal vs. Massachusetts

 by Cindy Toran, Tax Manager

cancelled-debtHow 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:

  1. Occurs under Title 11 bankruptcy
  2. Occurs when the taxpayer is insolvent (Debts greater than Assets)
  3. Is qualified farm indebtedness
  4. Is qualified real property business indebtedness (other than C-corporations)
  5. 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.

FacebooktwitterlinkedinFacebooktwitterlinkedin