If you are unwilling or unable to make payments on your timeshare loan, the developer may decide to cancel your debt. This may sound like a good thing, but it could result in a big tax bill!
According to the IRS, nearly any debt you owe that is canceled, forgiven or discharged becomes taxable income to you. You'll receive a Form 1099-C, "Cancellation of Debt," from the lender that forgave the debt.
In most situations, if you receive a Form 1099-C from a lender for a cancelled debt, you'll have to report the amount on that form to the Internal Revenue Service as taxable income. Certain exceptions do apply. For example, if you were insolvent (if your debts were greater than your assets) immediately prior to the cancellation of debt, your tax bill could be reduced.
We are not tax lawyers or accountants and we cannot give you advice on what to do when you receive a 1099-C. Nevertheless, we want to pass along some information from around the internet that may be of assistance to you. You should not rely on anything you read without consulting with a tax attorney or other tax professional.
You can read the official IRS explanation of the rules here. It can be a little technical and dense.
Here is a useful overview of 1099-C that is more approachable than the IRS version.
Here is some information about how to dispute the 1099-C.
Here is a story about a taxpayer who successfully challenged a 1099-C.
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