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Forgiveness of debt and no tax--Is it Fair?

April 5, 2011 - Sylvia Heldreth
Foreclosures have become a fairly common occurrence in today's economic climate. In some cases, the unpaid debt is forgiven if the sale of property does not return enough funds to fully satisfy the debt. If the debt is forgiven, Section 61 (a) of the Tax Code may apply. It states that "gross income means all income from whatever source derived, including income from discharge of indebtedness." This means that an income tax may be owed although typically cancellation of debt does not apply on the foreclosure of your residence and the amount of unpaid debt is not treated as straight income.

Some have said that the benefit of having debt forgiven without a tax being charged is unfair and penalizes those who honor their obligations.

What do you think?


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