Debt Forgiveness And Taxes

How hard will Mike get hit with taxes when he does debt forgiveness?

QUESTION: Mike wants to know the tax ramifications of settling a debt for pennies on the dollar, or debt forgiveness.

ANSWER: Debt forgiveness is taxable except on a personal residential mortgage. If you owe a bank $10,000 and you settle for $3,000, it creates a $7,000 1099 for you and adds to your adjusted gross income by that much.