Tax Tip Podcast or Blog Post for Real Estate Professionals and the Student Loan Exception with a Discharge of Indebtedness

Tax Tip Podcasts & Blog Posts for Realtors, Brokers, Real Estate Professionals
Discharge of Indebtedness

I understand that the remaining debt on your student loan has been cancelled and you would like information on the tax consequences of the cancellation.

Generally, if a creditor discharges you from a debt, you must include in your gross income the amount of the debt that has been discharged. The theory behind this rule is that you realize an increase in wealth to the extent you have been released from a debt because it frees up assets that you would otherwise need to pay the debt. This type of income is generally referred to as either discharge-of-indebtedness (DOI) income or cancellation-of-debt (COD) income. However, there are exceptions to the general rule.

DOI income relating to the discharge of a student loan is not includible in gross income if the discharge is made pursuant to a loan provision under which all or part of the loan is to be discharged when the student works for a certain period of time in a certain profession for any of a broad class of employers. This exception applies, for example, to the student loans of certain medical, nursing, and teaching professionals who work for employers in rural areas. A student loan for purposes of this exception is a loan made by:

(1) the United States, a state, the District of Columbia, or a possession or territory of the United States (or any instrumentality, agency, or political subdivision of such a government);

(2) a tax-exempt public benefit corporation that controls a state, county, or municipal hospital, and whose employees are deemed public employees under state law;

(3) an educational organization that originally received the funds to make the loan from such a government or tax-exempt public benefit corporation; or

(4) an educational organization that makes the loan (or refinances a loan) under a program designed to encourage its students to serve in occupations or areas with unmet needs and under which the services provided by the students or former students are directed by such a government or by a tax-exempt charitable organization.

A loan to refinance a qualified student loan also will qualify if it was made by an educational organization or a tax-exempt Code Sec. 501(a) organization under its program designed as described in (4) above.

The exception does not apply to a student loan discharged by an educational organization if the discharge is on account of services performed by the student for the organization. Thus, the cancellation of a student loan made by an educational organization because of services the student performed for that institution or another organization that provided funds for the loan must be included in the student’s gross income unless another exception or exclusion applies.

Amounts received under the National Health Service Corps Loan Repayment program and certain similar state loan repayment programs are excludible from gross income. These types of programs make student loan repayments for participants if the participants agree to provide health care services in geographic areas that have a shortage of health-care professionals.

In addition, an exception temporarily applies to discharges occurring after 2017 and before 2026. During this period, discharges of student loans are excluded from gross income if the discharge is on account of the death or the total and permanent disability of the student.

Please call me at your convenience so that we can discuss the rules for cancellation of student loan debt as they apply to your particular situation.

Brenda Fitch Real Estate Professional
Brenda Fitch Real Estate Professional
Discharge of Indebtedness

Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.

DON FITCH, CPA
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Palm Desert, CA 92260

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(Updated 04092021 DFA 320-293)

Published by Don Fitch, CPA

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