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Tax on forgiven loan

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doncopeland

Guest
My grandmother passed away,and she held a note on a loan for me to open a business. We were paying 6% interest. She annually forgave us the payments which did not exceed $10,000.00 so she did not have to pay gift tax. Now that she has passed, the loan has been forgiven. Since the debt is now part of the estate and I am the only heir, and the only one named in her will, does the balance of the forgiven debt become taxable income or does it now come under estate tax law?
 


dmode101

Member
The forgiven amount would be includable in her taxable estate for estate tax purposes. It should not be taxable income. You should confirm this and the details, though, with your estate attorney and/or accountant.
 

JETX

Senior Member
One big thing to consider here..... did YOU pay taxes on the 'unearned benefit'???

Lets say that the 'forgiven debt' was $6,000.00 in one year. Normally, since that is in fact a debt that you no longer have to pay (to be reported on 1099-misc), you would have to report it as unearned income and pay taxes on it.

This is not unlike what was happening in the 80's when people 'walked away' from their home and mortgage. The IRS determined that the unpaid amount was 'unearned income' and the mortgage companies sent 1099's to the debtor showing that they profited by the unpaid debt.

If your grandmother handled this properly, she should have reported the income of your payment, then offset that with a gift back to you of an equal amount.

It would appear that YOU have a possible tax liability.
 

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