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

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 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.

For more information, call Alex Franch at 781.789.7200. WorthTax has locations in Norwell, Dedham, and Weymouth, Massachussetts.
Alex Franch

Mr. Franch is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Mr. Franch is an Enrolled Agent and has eight years of tax preparation experience. He has been serving individuals, families, and businesses for several years with tax and financial planning strategies and is a junior partner with the firm. Mr. Franch is licensed by the Financial Industry Regulatory Authority (FINRA) with a Series 6, 63, 65, and 7, and by the Commonwealth of Massachusetts Division of Insurance.