Significance

• Borrowing money from a lending institution, which is subsequently forgiven, produces debt cancellation. The Internal Revenue Service (IRS) requires reporting the amount forgiven as income, since the taxpayer no longer has the obligation to repay the loan. The amount forgiven is reported on Form 1099-C, Cancellation of Debt.
  
  

Benefits

• For example, if the taxpayer refinanced the home for $200,000 and sells it for $100,000, then the $100,000 would have to be repaid (the difference between the purchase price and the sales price) unless the lender forgives the $100,000 under a short sale or modification loan. The $100,000 would normally be reported as income. However, the IRS provides tax relief for home sales or refinances between 2007 and 2012.
  
  

Size

• The amount of debt canceled is reported on Form 982 and appended to the homeowner's tax return. The maximum amount of forgiveness is $2 million. The IRS provides this tax relief for homeowners who refinanced their homes used as their principal residence.