The IRS Wants Its Share
If a debt is not repaid, or if it is formally canceled due to death, there is another potential complication: taxes. The lender may report that amount on a 1099-C form. Canceled debt is considered taxable income unless the borrower qualifies for an exception or an exclusion. At a minimum, one of these forms may require help from a tax professional to make sure the “income” that results is handled properly on the tax return. Or worse, a co-signer could be saddled with a big tax bill due to this phantom income.
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