Allan purchased his principal residence with a recourse loan. He lost the property to foreclosure in 2021. If the lender discharges the $25,000 deficiency, which statement is TRUE about income from cancellation of debt?

Canceled debt is always fully taxable.

The canceled debt will be taxable income for Allan unless it is discharged in bankruptcy.

If Allan is insolvent by $15,000, the full $25,000 of cancelled debt is excluded from income.

Allan may be eligible to exclude the income from tax as qualified principal residence indebtedness.