Are there any taxes on loan forgiveness?

UPDATED: Oct 12, 2011

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Are there any taxes on loan forgiveness?

My sibling had a promissory note with my father before he passed. She now wants me to forgive the loan is this legal or ethical? Loan amount was $58K with approximately $40k still owed.

Asked on October 12, 2011 under Estate Planning, Missouri


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 11 years ago | Contributor

It is legal and ethical to foregive a loan. However, there will be tax consequences to loan foregiveness. The IRS (and state taxing authorities) treat the foregivenss of a debt as income; that is, NOT having to pay $40k is mathematically the same as receiving $40k, and so it is considered income. As a consequence, your sister would have to pay taxes on the amount foregiven; moreover, the tax consequence would all fall due, I believe, when the loan is foregiven, so if the loan is foregiven in, say, November 2011, she would have another $40k of income imputed to her in 2011. (Though she should check with a tax planner or accountant to double check the timing and other details of the foregiveness.) It's a good deal for her still, but she needs to factor in the tax impact. Good luck.

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