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Canceled Debts — Exceptions: Taxable and Nontaxable Income (2025 IRS Guide)

This guide covers “Canceled Debts — Exceptions” within taxable and nontaxable income. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 525 (2025), Taxable and Nontaxable Income, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

In most cases, if a debt you owe is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in your income. You have no income from the canceled debt if it’s intended as a gift to you. A debt includes any indebtedness for which you’re liable or which attaches to property you hold.

If the debt is a nonbusiness debt, report the canceled amount on Schedule 1 (Form 1040), line 8c. If it’s a business debt, report the amount on Schedule C (Form 1040), or on Schedule F (Form 1040) if the debt is farm debt and you’re a farmer.

Canceled Debts — Exceptions

There are several exceptions to the inclusion of canceled debt in income. These are explained next.

Student loans.

Generally, if you’re responsible for making loan payments, and the loan is canceled or repaid by someone else, you must include the amount that was canceled or paid on your behalf in your gross income for tax purposes. However, in certain circumstances, you may be able to exclude amounts from gross income as a result of the cancellation or repayment of certain student loans. These exclusions are for:

Student loan cancellation due to meeting certain work requirements;
Cancellation of certain loans after December 31, 2020, and before January 1, 2026 (see Special rule for student loan discharges for 2021 through 2025); or
Certain student loan repayment assistance programs.

Exclusion for student loan cancellation due to meeting certain work requirements.

If your student loan is canceled in part or in whole in 2025 due to meeting certain work requirements, you may not have to include the canceled debt in your income. To qualify for this work-related exclusion, your loan must have been made by a qualified lender to assist you in attending an eligible educational organization described in section 170(b)(1)(A)(ii). In addition, the cancellation must be pursuant to a provision in the student loan that all or part of the debt will be canceled if you work:

For a certain period of time,

In certain professions, and

For any of a broad class of employers.

Caution:

The cancellation of your loan won’t qualify for tax-free treatment if it was made by an educational organization or tax-exempt section 501(c)(3) organization and was canceled because of the services you performed for either organization. See Exception, later.

Educational organization described in section 170(b)(1)(A)(ii).

This is an educational organization that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.

Qualified lenders.

These include the following.

The United States, or an instrumentality or agency thereof.
A state or territory of the United States; or the District of Columbia; or any political subdivision thereof.
A public benefit corporation that is tax exempt under section 501(c)(3); and that has assumed control of a state, county, or municipal hospital; and whose employees are considered public employees under state law.
An educational organization described in section 170(b)(1)(A)(ii), if the loan is made:
1. As part of an agreement with an entity described in (1), (2), or (3) under which the funds to make the loan were provided to the educational organization; or
2. Under a program of the educational organization that is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs where services provided by the students (or former students) are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization.

Special rule for student loan discharges for 2021 through 2025.

The American Rescue Plan Act of 2021 modified the treatment of student loan forgiveness for discharges in 2021 through 2025. Generally, if you’re responsible for making loan payments, and the loan is canceled or repaid by someone else, you must include the amount that was canceled or paid on your behalf in your gross income for tax purposes. However, in certain circumstances, you may be able to exclude this amount from gross income if the loan was one of the following.

A loan for postsecondary educational expenses.
A private education loan.
A loan from an educational organization described in section 170(b)(1)(A)(ii).
A loan from an organization exempt from tax under section 501(a) to refinance a student loan.

See Pubs. 4681 and 970 for further details.

Loan for postsecondary educational expenses.

This is any loan provided expressly for postsecondary education, regardless of whether provided through the educational organization or directly to the borrower, if such loan was made, insured, or guaranteed by one of the following.

The United States, or an instrumentality or agency thereof.
A state or territory of the United States; or the District of Columbia; or any political subdivision thereof.
An eligible educational organization.

Eligible educational organization.

An eligible educational organization is generally any accredited public, nonprofit, or proprietary (privately owned profit-making) college, university, vocational school, or other postsecondary educational organization. Also, the organization must be eligible to participate in a student aid program administered by the U.S. Department of Education.

An eligible educational organization also includes certain educational organizations located outside the United States that are eligible to participate in a student aid program administered by the U.S. Department of Education.

Tip:

The educational organization should be able to tell you if it is an eligible educational organization.

Private education loan.

A private education loan is a loan provided by a private educational lender that:

Is not made, insured, or guaranteed under title IV of the Higher Education Act of 1965; and
Is issued expressly for postsecondary educational expenses to a borrower, regardless of whether the loan is provided through the educational organization that the student attends or directly to the borrower from the private educational lender. A private education loan does not include an extension of credit under an open-end consumer credit plan, a reverse mortgage transaction, a residential mortgage transaction, or any other loan that is secured by real property or a dwelling.

Private educational lender.

A private educational lender is one of the following.

A financial institution that solicits, makes, or extends private education loans.
A federal credit union that solicits, makes, or extends private education loans.
Any other person engaged in the business of soliciting, making, or extending private education loans.

Caution:

The cancellation of your loan won’t qualify for tax-free treatment if it is canceled because of services you performed for the private educational lender that made the loan or other organization that provided the funds.

Loan from an educational organization described in section 170(b)(1)(A)(ii).

This is any loan made by the organization if the loan is made:

As part of an agreement with an entity described earlier under which the funds to make the loan were provided to the educational organization; or
Under a program of the educational organization that is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs where the services provided by the students (or former students) are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization.

Educational organization described in section 170(b)(1)(A)(ii).

Caution:

The cancellation of your loan won’t qualify for tax-free treatment if it was made by an educational organization, a tax-exempt section 501(c)(3) organization, or a private education lender (as defined in section 140(a)(7) of the Truth in Lending Act) and was canceled because of the services you performed for either such organization or private education lender. See Exception, later.

Section 501(c)(3) organization.

This is any corporation, community chest, fund, or foundation organized and operated exclusively for one or more of the following purposes.

Charitable.
Religious.
Educational.
Scientific.
Literary.
Testing for public safety.
Fostering national or international amateur sports competition (but only if none of its activities involve providing athletic facilities or equipment).
The prevention of cruelty to children or animals.

Exception.

In most cases, the cancellation of a student loan made by an educational organization because of services you performed for that organization or another organization that provided the funds for the loan must be included in gross income on your tax return.

Refinanced loan.

If you refinanced a student loan with another loan from an eligible educational organization or a tax-exempt organization, that loan may also be considered as made by a qualified lender. The refinanced loan is considered made by a qualified lender if it’s made under a program of the refinancing organization that is designed to encourage students to serve in occupations with unmet needs or in areas with unmet needs where the services required of the students are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization.

Student loan repayment assistance.

Student loan repayments made to you are tax free if you received them for any of the following.

The National Health Service Corps (NHSC) Loan Repayment Program.
A state education loan repayment program eligible for funds under the Public Health Service Act.
Any other state loan repayment or loan forgiveness program that is intended to provide for the increased availability of health services in underserved or health professional shortage areas (as determined by such state).

Caution:

You can’t deduct the interest you paid on a student loan to the extent payments were made through your participation in any of the above programs.

Deductible debt.

You don’t have income from the cancellation of a debt if your payment of the debt would be deductible. This exception applies only if you use the cash method of accounting. For more information, see chapter 5 of Pub. 334.

Price reduced after purchase.

In most cases, if the seller reduces the amount of debt you owe for property you purchased, you don’t have income from the reduction. The reduction of the debt is treated as a purchase price adjustment and reduces your basis in the property.

Excluded debt.

Don’t include a canceled debt in your gross income in the following situations.

The debt is canceled in a bankruptcy case under title 11 of the U.S. Code. See Pub. 908.
The debt is canceled when you’re insolvent. However, you can’t exclude any amount of canceled debt that is more than the amount by which you’re insolvent. See Pub. 908.
The debt is qualified farm debt and is canceled by a qualified person. See chapter 3 of Pub. 225.
The debt is qualified real property business debt. See chapter 5 of Pub. 334.
The cancellation is intended as a gift.
The debt is qualified principal residence indebtedness (QPRI), discussed next.

QPRI.

This is debt secured by your principal residence that you took out to buy, build, or substantially improve your principal residence. QPRI can’t be more than the cost of your principal residence plus improvements.

You must reduce the basis of your principal residence by the amount excluded from gross income. To claim the exclusion, you must file Form 982 with your tax return.

Principal residence.

Your principal residence is the home where you ordinarily live most of the time. You can have only one principal residence at any one time.

Amount eligible for exclusion.

The exclusion applies only to debt discharged after 2006 and in most cases before 2026. The maximum amount you can treat as QPRI is $750,000 ($375,000 if married filing separately). You can’t exclude debt canceled because of services performed for the lender or on account of any other factor not directly related to a decline in the value of your residence or to your financial condition.

Limitation.

If only part of a loan is QPRI, the exclusion applies only to the extent the canceled amount is more than the amount of the loan immediately before the cancellation that isn’t QPRI.

Example 24.

You file a joint return. Your principal residence is secured by a debt of $900,000, of which $700,000 is QPRI. Your residence is sold for $600,000 and $300,000 of debt is canceled. Only $100,000 of the canceled debt may be excluded from income (the $300,000 that was discharged minus the $200,000 of nonqualified debt).

Forgiveness of PPP loans.

The forgiveness of a PPP loan creates tax-exempt income, so although you don’t need to report the income from the forgiveness of your PPP loan on Form 1040 or 1040-SR, you do need to report certain information related to your PPP loan.

Revenue Procedure 2021-48, 2021-49 I.R.B. 835, permits taxpayers to treat tax-exempt income resulting from the forgiveness of a PPP loan as received or accrued (1) as, and to the extent that, eligible expenses are paid or incurred; (2) when you apply for forgiveness of the PPP loan; or (3) when forgiveness of the PPP loan is granted. If you have tax-exempt income resulting from the forgiveness of a PPP loan, attach a statement to your return reporting each tax year for which you’re applying Revenue Procedure 2021-48, and which section of Revenue Procedure 2021-48 you’re applying—either section 3.01(1), (2), or (3). Any statement should include the following information for each PPP loan.

Your name, address, and ITIN or SSN.
A statement that you’re applying or applied section 3.01(1), (2), or (3) of Revenue Procedure 2021-48, and for what tax year.
The amount of tax-exempt income from forgiveness of the PPP loan that you’re treating as received or accrued and for what tax year.
Whether forgiveness of the PPP loan has been granted as of the date you file your return.

Write “RP 2021-48” at the top of your attached statement.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

Publication 525 (2025), Taxable and Nontaxable Income: Miscellaneous Income — Canceled Debts — Exceptions — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.

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