Forgiven Interest

[Corduroy Frog]

Today had a 1099-C for $45K, of which $8K was INTEREST.

As I understand it, we begin with $45K as income, and use Form 982 to reduce this to a non-taxable amount.

However, we are told only the principle can be used to offset this income (in various categories on the 982). This means the $8K will be left over and hence taxable.

However, TTB has an interesting Authors Note: a discussion about whether the interest is taxable or not. The IRS has not definitively answered ANYTHING about this.

So...to cut to the bottom line -- is the $8K interest taxable or not?

[David1980]

The IRS stance seems apparent in Pub 4681,

nterest included in canceled debt. If any interest is forgiven and included in the amount of canceled debt in box 2, the interest portion that is included in box 2 will be shown in box 3. Whether the interest portion of the canceled debt must be included in your income depends on whether the interest would be deductible if you paid it. See Deductible Debt under Exceptions, later.