yes it's cancelled debt is normally taxable. the major exception is chapter 11 bankruptcy. if this is the case complete the cancelled debt worksheet section VI
in other cases where property was surrendered other sections of this worksheet may need to be completed. We don't have enough info and this can be complicated depending on how the debt arose and what happened in bankruptcy. Are you insolvent to extent insolvent it's not taxable this requires completing section VIII of the cancelled debt worksheet. the use of a tax pro may be needed. Completing the cancelled debt worksheet generates IRS tax form 982.
Exclusions from gross income:
- Debt canceled in a Title 11 bankruptcy case
- Debt canceled to the extent insolvent
- Cancellation of qualified farm indebtedness
- Cancellation of qualified real property business indebtedness
- Cancellation of qualified principal residence indebtedness that is discharged before January 1, 2026, or discharged subject to an arrangement that is entered into and evidenced in writing before January 1, 2026
Generally, if you exclude canceled debt from income under one of the exclusions listed above, you must reduce certain tax attributes (certain credits and carryovers, losses and carryovers, basis of assets, etc.) (but not below zero) by the amount excluded. You must report the amount qualifying for exclusion, and any corresponding reduction of those tax attributes on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjus... and attach to your tax return. For cancellation of qualified principal residence indebtedness that's excluded from income, you must only reduce your basis in your principal residence. For cancellation of qualified real property business indebtedness, you must only reduce your basis in your depreciable real property.
