If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the canceled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven or the property is abandoned or foreclosed, the amount of the debt owed at the time of abandonment or foreclosure or the amount of canceled debt in the case of forgiveness is reportable. The lender is usually required to report the amount of debt owed (principal only) or the amount of canceled debt to you and the IRS on a Form 1099-A, Acquisition or Abandonment of Secured Property, or Form 1099-C, Cancellation of Debt.

If you received a Form 1099-A (PDF) or Form 1099-C (PDF) and the information is incorrect, contact the lender to make corrections. For additional information on foreclosures and abandonments, refer to Publication 544, Sales and Other Dispositions of Assets, under the section called "Foreclosures and Repossessions."

Some canceled debts are not includible or fully includible in income. For example, if you have canceled debt on your principal residence, you may be able to exclude part or all of the amount canceled from your income under the Mortgage Forgiveness Debt Relief Act of 2007. For additional information, refer to Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (For Individuals), Topic 431, and instructions on Form 982 (PDF), Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).