Question

What is a purchase price reduction? When the buyer and seller agree to reduce the purchase price of real property after agreeing on price terms, but before the sale is closed. When an insolvent buyer receives credit from a seller for the purchase of property, and the seller later reduces the purchase price and relieves the buyer of some of the debt associated with the original purchase. When the buyer and seller agree to reduce the purchase price of real property after the sale has closed, and the seller returns the agreed-upon amount to the buyer. When a solvent buyer receives credit from a seller for the purchase of property, and the seller later reduces the purchase price and relieves the buyer of some of the debt associated with the original purchase.

Answer 1

Price Reduced After Purchase. If debt you owe the seller for the purchase of property is reduced by the seller at a time when you aren't insolvent and there deduction doesn't occur in a title 11 bankruptcy case, the reduction doesn't result in cancellation of debt income.

Purchase Price Reduction means, with respect to any particular Real Estate or any particular Lease, the amount of the Purchase Price to be allocated to such Real Estate or such Lease as agreed upon by Seller, the Committee and Purchaser for the Properties. If no mutual agreement is reached, then the Purchase Price Reduction shall mean the amount of the reduction to the Purchase Price as determined by the Bankruptcy Court

What’s New

Qualified principal residence indebtedness. Qualified principal residence indebtedness can only be excluded from income after December 31, 2016, if the discharge is subject to an arrangement that was entered into and evidenced in writing before January 1, 2017.

Identifiable event codes. T.D. 9793 removed the rule that a deemed discharge of indebtedness for which a Form 1099-C must be filed occurs at the expiration of a 36-month nonpayment testing period. Code H is now used to indicate an actual discharge before an identifiable event (formerly Code I).

Reminder

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing & Exploited Children® (NCMEC). Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank.

Introduction

This publication explains the federal tax treatment of canceled debts, foreclosures, repossessions, and abandonments.

Generally, if you owe a debt to someone else and they cancel or forgive that debt for less than its full amount, you are treated for income tax purposes as having income and may have to pay tax on this income.

Note.

This publication generally refers to debt that is canceled, forgiven, or discharged for less than the full amount of the debt as "canceled debt."

Sometimes a debt, or part of a debt, that you don't have to pay isn't considered canceled debt. These exceptions are discussed later under Exceptions .

Sometimes a canceled debt may be excluded from your income. But if you do exclude canceled debt from income, you may be required to reduce your "tax attributes." These exclusions and the reduction of tax attributes associated with them are discussed later under Exclusions .

Foreclosure and repossession are remedies that your lender may exercise if you fail to make payments on your loan and you have previously granted that lender a mortgage or other security interest in some of your property. These remedies allow the lender to seize or sell the property securing the loan. When your property is foreclosed upon or repossessed and sold, you are treated as having sold the property and you may recognize taxable gain. Whether you also recognize income from canceled debt depends in part on whether you are personally liable for the debt and in part on whether the outstanding loan balance is more than the fair market value (FMV) of the property. Figuring your gain or loss and income from canceled debt arising from a foreclosure or repossession is discussed later under Foreclosures and Repossessions .

Generally, you abandon property when you voluntarily and permanently give up possession and use of property you own with the intention of ending your ownership but without passing it on to anyone else. Figuring your gain or loss and income from canceled debt arising from an abandonment is discussed later under Abandonments .