Department of the Treasury

Internal Revenue Service

Publication 4681

Cat. No. 51508F

Canceled Debts, Foreclosures, Repossessions, and Abandonments

(for Individuals)

For use in preparing 2023 Returns

January 03, 2024

Future Developments

For the latest information about developments related to Pub. 4681, such as legislation enacted after it was published, go to IRS.gov/Pub4681.

What’s New

Discharge of qualified principal residence indebtedness before 2026. Qualified principal residence indebtedness can be excluded from income for discharges before January 1, 2026.

Reminders

Discharge of student loan debt. If your student loan debt was discharged, in whole or in part, after December 31, 2020, the amount of debt that was discharged may be nontaxable. See Student Loans, later.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing & Exploited Children® (NCMEC). Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 800-THE-LOST (800﻿-﻿843﻿-﻿5678) if you recognize a child.

Introduction

This publication explains the federal tax treatment of canceled debts, foreclosures, repossessions, and abandonments.

Generally, if you owe a debt to someone else and they cancel or forgive that debt for less than its full amount, you are treated for income tax purposes as having income and may have to pay tax on this income.

Note.  This publication generally refers to debt that is canceled, forgiven, or discharged for less than the full amount of the debt as “canceled debt.”

Sometimes a debt, or part of a debt, that you don't have to pay isn't considered canceled debt. These exceptions are discussed later under Exceptions.

 Sometimes a canceled debt may be excluded from your income. But if you do exclude canceled debt from income, you may be required to reduce your “tax attributes.” These exclusions and the reduction of tax attributes associated with them are discussed later under Exclusions.

Foreclosure and repossession are remedies that your lender may exercise if you fail to make payments on your loan and you have previously granted that lender a mortgage or other security interest in some of your property. These remedies allow the lender to seize or sell the property securing the loan. When your property is foreclosed upon or repossessed and sold, you are treated as having sold the property and you may recognize taxable gain. Whether you also recognize income from canceled debt depends in part on whether you are personally liable for the debt and in part on whether the outstanding loan balance is more than the fair market value (FMV) of the property. Figuring your gain or loss and income from canceled debt arising from a foreclosure or repossession is discussed later under Foreclosures and Repossessions.

Generally, you abandon property when you voluntarily and permanently give up possession and use of property you own with the intention of ending your ownership but without passing it on to anyone else. Figuring your gain or loss and income from canceled debt arising from an abandonment is discussed later under Abandonments.

Comments and suggestions.

We welcome your comments about this publication and suggestions for future editions.

You can send us comments through IRS.gov/FormComments. Or, you can write to the Internal Revenue Service, Tax Forms and Publications, 1111 Constitution Ave. NW, IR-6526, Washington, DC 20224.

Although we can’t respond individually to each comment received, we do appreciate your feedback and will consider your comments and suggestions as we revise our tax forms, instructions, and publications. Don’t  send tax questions, tax returns, or payments to the above address.

Getting answers to your tax questions.

If you have a tax question not answered by this publication or the How To Get Tax Help section at the end of this publication, go to the IRS Interactive Tax Assistant page at IRS.gov/Help/ITA where you can find topics by using the search feature or viewing the categories listed.

Getting tax forms, instructions, and publications.

Go to IRS.gov/Forms to download current and prior-year forms, instructions, and publications.

Ordering tax forms, instructions, and publications.

Go to IRS.gov/OrderForms to order current forms, instructions, and publications; call 800﻿-﻿829﻿-﻿3676 to order prior-year forms and instructions. The IRS will process your order for forms and publications as soon as possible. Don’t resubmit requests you’ve already sent us. You can get forms and publications faster online.

Useful Items

You may want to see:

Publication

﻿ ﻿225﻿ ﻿ Farmer's Tax Guide

﻿ ﻿334﻿ ﻿ Tax Guide for Small Business (For Individuals Who Use Schedule﻿ ﻿C)

﻿ ﻿523﻿ ﻿ Selling Your Home

﻿ ﻿525﻿ ﻿ Taxable and Nontaxable Income

﻿ ﻿536﻿ ﻿ Net Operating Losses (NOLs) for Individuals, Estates, and Trusts

﻿ ﻿542﻿ ﻿ Corporations

﻿ ﻿544﻿ ﻿ Sales and Other Dispositions of Assets

﻿ ﻿551﻿ ﻿ Basis of Assets

﻿ ﻿908﻿ ﻿ Bankruptcy Tax Guide

Form (and Instructions)

﻿ ﻿982﻿ ﻿ Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)

﻿ ﻿1099-C﻿ ﻿ Cancellation of Debt

﻿ ﻿1099-DIV﻿ ﻿ Dividends and Distributions

﻿ ﻿3800﻿ ﻿ General Business Credit

Common Situations Covered in This Publication

The sections of this publication that apply to you depend on the type of debt canceled, the tax attributes you have, and whether or not you continue to own the property that was subject to the debt. Some examples of common circumstances are provided in the following paragraphs to help guide you through this publication. These examples don't cover every situation but are intended to provide general guidance for the most common situations.

Nonbusiness credit card debt cancellation.

If you had a nonbusiness credit card debt canceled, you may be able to exclude the canceled debt from income if the cancellation occurred in a title 11 bankruptcy case or you were insolvent immediately before the cancellation. You should also read Bankruptcy or Insolvency under Exclusions in chapter﻿ ﻿1 to see if you can exclude the canceled debt from income under one of those provisions. If you can exclude part or all of the canceled debt from income, you should also read Bankruptcy and Insolvency under Reduction of Tax Attributes in chapter﻿ ﻿1.

Personal vehicle repossession.

If you had a personal vehicle repossessed and disposed of by the lender during the year, you will need to determine your gain or nondeductible loss on the disposition. This is explained in chapter﻿ ﻿2. If the lender also canceled all or part of the remaining amount of the loan, you may be able to exclude the canceled debt from income if the cancellation occurred in a title 11 bankruptcy case or you were insolvent immediately before the cancellation. You should read Bankruptcy or Insolvency under Exclusions in chapter﻿ ﻿1 to see if you can exclude the canceled debt from income under one of those provisions. If you can exclude part or all of the canceled debt from income, you should also read Bankruptcy and Insolvency under Reduction of Tax Attributes in chapter﻿ ﻿1.

Main home foreclosure or abandonment.

If a lender foreclosed on your main home during the year, you will need to determine your gain or loss on the foreclosure. Foreclosures are explained in chapter﻿ ﻿2 and abandonments are explained in chapter﻿ ﻿3.

Main home loan modification (workout agreement).

If a lender agreed to a mortgage loan modification (a “workout”) in 2022 that included a reduction in the principal balance of the loan in 2023, you should read Qualified Principal Residence Indebtedness under Exclusions in chapter﻿ ﻿1 to see if you can exclude part or all of the canceled debt from income. If you can exclude part or all of the canceled debt from income, you should also read Qualified Principal Residence Indebtedness under Reduction of Tax Attributes in chapter﻿ ﻿1.

1.

Canceled Debts

This chapter discusses the tax treatment of canceled debts.

General Rules

Generally, if a debt for which you are personally liable is forgiven or discharged for less than the full amount owed, the debt is considered canceled in whatever amount it remained unpaid. There are exceptions to this rule, discussed under Exceptions, later. Generally, you must include the canceled debt in your income. However, you may be able to exclude the canceled debt. See Exclusions, later.

Example. You owed your friend $1,000. Your friend agreed to accept and you paid $400 in satisfaction of the entire debt. You have canceled debt of $600.

Example. You owed your friend.$1,000. You both agreed that you would provide your friend with services (instead of money) in full satisfaction of the debt. You don't have canceled debt. Instead, you have income from services.

A debt includes any indebtedness:

For which you are liable, or

Subject to which you hold property.

 Debt for which you are personally liable is recourse debt. All other debt is nonrecourse debt.

If you aren't personally liable for the debt, you don't have ordinary income from the cancellation of debt unless you retain the collateral and either:

The lender offers a discount for the early payment of the debt, or

The lender agrees to a loan modification that results in the reduction of the principal balance of the debt.

See Discounts and Loan Modifications, later.

However, upon the disposition of the property securing a nonrecourse debt, the amount realized includes the entire unpaid amount of the debt, not just the FMV of the property. As a result, you may realize a gain or loss if the outstanding debt immediately before the disposition is more or less than your adjusted basis in the property. For more details on figuring your gain or loss, see chapter﻿ ﻿2 of this publication or see Pub. 544.

There are several exceptions and exclusions that may result in part or all of a canceled debt being nontaxable. See Exceptions and Exclusions, later. You must report any taxable canceled debt as ordinary income on:

Schedule 1 (Form 1040), line﻿ ﻿8c, if the debt is a nonbusiness debt;

Schedule﻿ ﻿C (Form 1040), line﻿ ﻿6, if the debt is related to a nonfarm sole proprietorship;

Schedule﻿ ﻿E (Form 1040), line﻿ ﻿3, if the debt is related to nonfarm rental of real property;

Form 4835, line﻿ ﻿6, if the debt is related to a farm rental activity for which you use Form 4835 to report farm rental income based on crops or livestock produced by a tenant; or

Schedule﻿ ﻿F (Form 1040), line﻿ ﻿8, if the debt is farm debt and you are a farmer.

Form 1099-C

If you receive a Form 1099-C, that means an applicable entity has reported an identifiable event to the IRS regarding a debt you owe. For information on the reasons an applicable entity files Form 1099-C, see Identifiable event codes, later. Unless you meet one of the exceptions or exclusions discussed later, this canceled debt is ordinary income and must be reported on the appropriate form discussed above.

If you had a student loan that was discharged after December 31, 2020, and the amount of the discharged loan is nontaxable, you won’t receive a Form 1099-C from the lender or servicer of your student loan.

An applicable entity includes the following.

A financial institution.

A credit union.

Any of the following, its successor, or subunit of one of the following.

The Federal Deposit Insurance Corporation (FDIC).

The Resolution Trust Corporation (RTC).

The National Credit Union Administration (NCUA).

Any other federal executive agency, including government corporations, any military department, the U.S. Postal Service, or the Postal Rate Commission.

A corporate subsidiary of a financial institution or credit union (if the affiliation subjects the subsidiary to federal or state regulation).

A federal government agency, including a department, an agency, a court or court administrative office, or a judicial or legislative instrumentality.

Any organization of which lending money is a significant trade or business.

For more information on the applicable entities that must file a Form 1099-C, see the Instructions for Forms 1099-A and 1099-C, available at irs.gov/instructions/i1099ac.

Identifiable event codes.

Box 6 of Form 1099-C should indicate the reason the creditor filed this form. The codes shown in box 6 are explained next. Also, see the chart after the explanation for a quick reference guide for the codes used in box 6.

Code A—Bankruptcy. Code A is used to identify cancellation of debt as a result of a title 11 bankruptcy case. See Bankruptcy, later.

Code B—Other judicial debt relief. Code B is used to identify cancellation of debt as a result of a receivership, foreclosure, or similar federal or state court proceeding other than bankruptcy.

Code C—Statute of limitations or expiration of deficiency period. Code C is used to identify cancellation of debt either when the statute of limitations for collecting the debt expires or when the statutory period for filing a claim or beginning a deficiency judgment proceeding expires. In the case of the expiration of a statute of limitations, an identifiable event occurs only if and when your affirmative defense of the statute of limitations is upheld in a final judgment or decision in a judicial proceeding, and the period for appealing the judgment or decision has expired.

Code D—Foreclosure election. Code D is used to identify cancellation of debt when the creditor elects foreclosure remedies that statutorily end or bar the creditor's right to pursue collection of the debt. This event applies to a mortgage lender or holder who is barred from pursuing debt collection after a power of sale in the mortgage or deed of trust is exercised.

Code E—Debt relief from probate or similar proceeding. Code E is used to identify cancellation of debt as a result of a probate court or similar legal proceeding.

Code F—By agreement. Code F is used to identify cancellation of debt as a result of an agreement between the creditor and the debtor to cancel the debt at less than full consideration.

Code G—Decision or policy to discontinue collection. Code G is used to identify cancellation of debt as a result of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. For purposes of this identifiable event, a defined policy includes both a written policy and the creditor's established business practice.

Code H—Other actual discharge before identifiable event. Code H is used to identify an actual cancellation of debt that occurs before any of the identifiable events described in codes A through G.

Form 1099-C Reference Guide for Box 6 Identifiable Event Codes

A

Bankruptcy

B

Other judicial debt relief

C

Statute of limitations or expiration of deficiency period

D

Foreclosure election

E

Debt relief from probate or similar proceeding

F

By agreement

G

Decision or policy to discontinue collection

H

Other actual discharge before identifiable event

Even if you didn't receive a Form 1099-C, you must report canceled debt as gross income on your tax return unless one of the exceptions or exclusions described later applies.

Amount of canceled debt.

The amount in box 2 of Form 1099-C may represent some or all of the debt that has been canceled. The amount in box 2 will include principal and may include interest and other nonprincipal amounts (such as fees or penalties). Unless you meet one of the exceptions or exclusions discussed later, the amount of the debt that has been canceled is ordinary income and must be reported on the appropriate form, as discussed earlier.

Interest included in canceled debt.

If any interest is included in the amount of canceled debt in box 2, it 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.

Persons who each receive a Form 1099-C showing the full amount of debt.

If you and another person were jointly and severally liable for a canceled debt, each of you may get a Form 1099-C showing the entire amount of the canceled debt. However, you may not have to report that entire amount as income. The amount, if any, you must report depends on all the facts and circumstances, including:

State law,

The amount of debt proceeds each person received,

How much of any interest deduction from the debt was claimed by each person,

How much of the basis of any co-owned property bought with the debt proceeds was allocated to each co-owner, and

Whether the canceled debt qualifies for any of the exceptions or exclusions described in this publication.

See Example 3 under Insolvency, later.

Discounts and Loan Modifications

If a lender discounts (reduces) the principal balance of a loan because you pay it off early, or agrees to a loan modification (a “workout”) that includes a reduction in the principal balance of a loan, the amount of the discount or the amount of principal reduction is canceled debt. However, if the debt is nonrecourse and you didn't retain the collateral, you don't have cancellation of debt income. The amount of the canceled debt must be included in income unless one of the exceptions or exclusions described later applies. For more details, see Exceptions and Exclusions, later.

Sales or Other Dispositions (Such as Foreclosures and Repossessions)

Recourse debt.

If you owned property that was subject to a recourse debt in excess of the FMV of the property, the lender's foreclosure or repossession of the property is treated as a sale or disposition of the property by you and may result in your realization of gain or loss. The gain or loss on the disposition of the property is measured by the difference between the FMV of the property at the time of the disposition and your adjusted basis (usually your cost) in the property. The character of the gain or loss (such as ordinary or capital) is determined by the character of the property. If the lender forgives all or part of the amount of the debt in excess of the FMV of the property, the cancellation of the excess debt may result in ordinary income. The ordinary income from the cancellation of debt (the excess of the canceled debt over the FMV of the property) must be included in your gross income reported on your tax return unless one of the exceptions or exclusions described later applies. For more details, see Exceptions and Exclusions, later.

Nonrecourse debt.

If you owned property that was subject to a nonrecourse debt in excess of the FMV of the property, the lender's foreclosure on the property doesn't result in ordinary income from the cancellation of debt. The entire amount of the nonrecourse debt is treated as an amount realized on the disposition of the property. The gain or loss on the disposition of the property is measured by the difference between the total amount realized (the entire amount of the nonrecourse debt plus the amount of cash and the FMV of any property received) and your adjusted basis in the property. The character of the gain or loss is determined by the character of the property.

More information.

See chapter﻿ ﻿2 of this publication and Pubs. 523, 544, and 551 for more details.

Abandonments

Recourse debt.

If you abandon property that secures a debt for which you are personally liable (recourse debt) and the debt is canceled, you will realize ordinary income equal to the canceled debt. You must report this income on your tax return unless one of the exceptions or exclusions described later applies. For more details, see Exceptions and Exclusions, later. This income is separate from any amount realized from the abandonment of the property. For more details, see chapter﻿ ﻿3.

Nonrecourse debt.

If you abandon property that secures a debt for which you aren't personally liable (nonrecourse debt), you may realize gain or loss but won't have cancellation of indebtedness income.

Stockholder Debt

If you are a stockholder in a corporation and the corporation cancels or forgives your debt to it, the canceled debt is a constructive distribution. For more information, see Pub. 542.

Exceptions

There are several exceptions to the requirement that you include canceled debt in income. These exceptions apply before the exclusions discussed later and don't require you to reduce your tax attributes.

Gifts, Bequests, Devises, and Inheritances

In most cases, you don't have income from canceled debt if the debt is canceled as a gift, bequest, devise, or inheritance.

Student Loans

Generally, if you are responsible for making loan payments, and the loan is canceled or repaid by someone else, you must include the amount that was canceled or paid on your behalf in your gross income for tax purposes. However, in certain circumstances, you may be able to exclude amounts from gross income as a result of the cancellation or repayment of certain student loans. These exclusions are for:

Student loan cancellation due to meeting certain work requirements;

Cancellation of certain loans after December 31, 2020, and before January 1, 2026; or

Student loan repayment assistance programs.

Exclusion for student loan cancellation due to meeting certain work requirements.

If your student loan is canceled in part or in whole in 2023 due to meeting certain work requirements, you may not have to include the canceled debt in your income. To qualify for this work-related exclusion, your loan must have been made by a qualified lender to assist you in attending an eligible educational organization described in section 170(b)(1)(A)(ii). In addition, the cancellation must be pursuant to a provision in the student loan that all or part of the debt will be canceled if you work:

For a certain period of time,

In certain professions, and

For any of a broad class of employers.

The cancellation of your loan won’t qualify for tax-free treatment if it was made by an educational organization or tax-exempt section 501(c)(3) organization and was canceled because of the services you performed for either organization. See Exception, later.

Educational organization described in section 170(b)(1)(A)(ii).

This is an educational organization that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.

Qualified lenders.

These include the following.

The United States, or an instrumentality or agency thereof.

A state or territory of the United States; or the District of Columbia; or any political subdivision thereof.

A public benefit corporation that is tax-exempt under section 501(c)(3); and that has assumed control of a state, county, or municipal hospital; and whose employees are considered public employees under state law.

An educational organization described in section 170(b)(1)(A)(ii), if the loan is made:

As part of an agreement with an entity described in (1), (2), or (3) under which the funds to make the loan were provided to the educational organization; or

Under a program of the educational organization that is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs where services provided by the students (or former students) are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization.

Special rule for student loan discharges for 2021 through 2025.

The American Rescue Plan Act of 2021 modified the treatment of student loan forgiveness for discharges in 2021 through 2025. Generally, if you are responsible for making loan payments, and the loan is canceled or repaid by someone else, you must include the amount that was canceled or paid on your behalf in your gross income for tax purposes. However, in certain circumstances, you may be able to exclude this amount from gross income if the loan was one of the following.

A loan for postsecondary educational expenses.

A private education loan.

A loan from an educational organization described in section 170(b)(1)(A)(ii).

 A loan from an organization exempt from tax under section 501(a) to refinance a student loan.

Loan for postsecondary educational expenses.

This is any loan provided expressly for postsecondary education, regardless of whether provided through the educational organization or directly to the borrower, if such loan was made, insured, or guaranteed by one of the following.

The United States, or an instrumentality or agency thereof.

A state or territory of the United States; or the District of Columbia; or any political subdivision thereof.

An eligible educational organization.

Eligible educational organization.

An eligible educational organization is generally any accredited public, nonprofit, or proprietary (privately owned profit-making) college, university, vocational school, or other postsecondary educational organization. Also, the organization must be eligible to participate in a student aid program administered by the U.S. Department of Education.

An eligible educational organization also includes certain educational organizations located outside the United States that are eligible to participate in a student aid program administered by the U.S. Department of Education.

taxtipThe educational organization should be able to tell you if it is an eligible educational organization.

Private education loan.

A private education loan is a loan provided by a private educational lender that:

Is not made, insured, or guaranteed under Title IV of the Higher Education Act of 1965; and

Is issued expressly for postsecondary educational expenses to a borrower, regardless of whether the loan is provided through the educational organization that the student attends or directly to the borrower from the private educational lender. A private education loan does not include an extension of credit under an open end consumer credit plan, a reverse mortgage transaction, a residential mortgage transaction, or any other loan that is secured by real property or a dwelling.

Private educational lender.

A private educational lender is one of the following.

A financial institution that solicits, makes, or extends private education loans.

A federal credit union that solicits, makes, or extends private education loans.

Any other person engaged in the business of soliciting, making, or extending private education loans.

cautionThe cancellation of your loan won’t qualify for tax-free treatment if it is canceled because of services you performed for the private educational lender that made the loan or other organization that provided the funds.

Loan from an educational organization described in section 170(b)(1)(A)(ii).

This is any loan made by the organization if the loan is made:

As part of an agreement with an entity described earlier under which the funds to make the loan were provided to the educational organization; or

Under a program of the educational organization that is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs where the services provided by the students (or former students) are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization.

Educational organization described in section 170(b)(1)(A)(ii).

This is an educational organization that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.

cautionThe cancellation of your loan won’t qualify for tax-free treatment if it was made by an educational organization, a tax-exempt section 501(c)(3) organization, or a private education lender (as defined in section 140(a)(7) of the Truth in Lending Act) and was canceled because of the services you performed for either such organization or private education lender. See Exception, later.

Section 501(c)(3) organization.

This is any corporation, community chest, fund, or foundation organized and operated exclusively for one or more of the following purposes.

Charitable.

Religious.

Educational.

Scientific.

Literary.

Testing for public safety.

Fostering national or international amateur sports competition (but only if none of its activities involve providing athletic facilities or equipment).

The prevention of cruelty to children or animals.

Exception.

In most cases, the cancellation of a student loan made by an educational organization because of services you performed for that organizationn or another organization that provided the funds for the loan must be included in gross income on your tax return.

Refinanced loan.

If you refinanced a student loan with another loan from an eligible educational organization or a tax-exempt organization, that loan may also be considered as made by a qualified lender. The refinanced loan is considered made by a qualified lender if it’s made under a program of the refinancing organization that is designed to encourage students to serve in occupations with unmet needs or in areas with unmet needs where the services required of the students are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization.

Student loan repayment assistance.

Student loan repayments made to you are tax free if you received them for any of the following.

The National Health Service Corps (NHSC) Loan Repayment Program.

A state education loan repayment program eligible for funds under the Public Health Service Act.

Any other state loan repayment or loan forgiveness program that is intended to provide for the increased availability of health services in underserved or health professional shortage areas (as determined by such state).

CautionYou can’t deduct the interest you paid on a student loan to the extent payments were made through your participation in any of the above programs.

Deductible Debt

If you use the cash method of accounting, you don't realize income from the cancellation of debt if the payment of the debt would have been a deductible expense. This exception applies before the price reduction exception discussed next.

Example. In December 2022, you get accounting services for your farm on credit. In early 2023, you have trouble paying your farm debts and your accountant forgives part of the amount you owe for the accounting services. How you treat the canceled debt depends on your method of accounting.

Cash method. You don't include the canceled debt in income because payment of the debt would have been deductible as a business expense in 2023.

Accrual method. Unless another exception or exclusion applies, you must include the canceled debt in ordinary income because the expense was deductible in 2022 when you incurred the debt.

Price Reduced After Purchase

If debt you owe the seller for the purchase of property is reduced by the seller at a time when you aren't insolvent and the reduction doesn't occur in a title 11 bankruptcy case, the reduction doesn't result in cancellation of debt income. However, you must reduce your basis in the property by the amount of the reduction of your debt to the seller. The rules that apply to bankruptcy and insolvency are explained in Exclusions next.

Exclusions

After you have applied any exceptions to the general rule that a canceled debt is included in your income, there are several reasons why you might still be able to exclude a canceled debt from your income. These exclusions are explained next. If a canceled debt is excluded from your income, it is nontaxable. In most cases, however, if you exclude canceled debt from income under one of these provisions, you must also reduce your tax attributes (certain credits, losses, and basis of assets) as explained later under Reduction of Tax Attributes.

Bankruptcy

Debt canceled in a title 11 bankruptcy case isn't included in your income. A title 11 bankruptcy case is a case under title 11 of the United States Code (including all chapters in title 11 such as chapters 7, 11, and 13). You must be a debtor under the jurisdiction of the court and the cancellation of the debt must be granted by the court or occur as a result of a plan approved by the court.

You don’t qualify for the bankruptcy exclusion by being an owner of, or a partner in a partnership that owns, a grantor trust or disregarded entity that is a debtor in a title 11 bankruptcy case. You must be a debtor in a title 11 bankruptcy case to qualify for this exclusion.

How to report the bankruptcy exclusion.

To show that your debt was canceled in a bankruptcy case and is excluded from income, attach Form 982 to your federal income tax return and check the box on line﻿ ﻿1a. Lines 1b through 1e don't apply to a cancellation that occurs in a title 11 bankruptcy case. Enter the total amount of debt canceled in your title 11 bankruptcy case on line﻿ ﻿2. You must also reduce your tax attributes in Part II of Form 982, as explained under Reduction of Tax Attributes, later.

Insolvency

Keep for Your Records Keep for Your Records

Insolvency Worksheet

Date debt was canceled (mm/dd/yy)

Part I. Total liabilities immediately before the cancellation (don't include the same liability in more than one category)

Liabilities (debts)

Amount Owed
Immediately Before the
Cancellation

1.

Credit card debt

$

2.

Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on main home, any additional home, or property held for investment or used in a trade or business)

$

3.

Car and other vehicle loans

$

4.

Medical bills owed

$

5.

Student loans

$

6.

Accrued or past-due mortgage interest

$

7.

Accrued or past-due real estate taxes

$

8.

Accrued or past-due utilities (water, gas, electric, etc.)

$

9.

Accrued or past-due childcare costs

$

10.

Federal or state income taxes remaining due (for prior tax years)

$

11.

Judgments

$

12.

Business debts (including those owed as a sole proprietor or partner)

$

13.

Margin debt on stocks and other debt to purchase or secured by investment assets other than real property

$

14.

Other liabilities (debts) not included above

$

15.

Total liabilities immediately before the cancellation. Add lines 1 through 14.

$

Part II. Fair market value (FMV) of assets owned immediately before the cancellation (don't include the FMV of the same asset in more than one category)

Assets

FMV Immediately Before
the Cancellation

16.

Cash and bank account balances

$

17.

Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business)

$

18.

Cars and other vehicles

$

19.

Computers

$

20.

Household goods and furnishings (for example, appliances, electronics, furniture, etc.)

$

21.

Tools

$

22.

Jewelry

$

23.

Clothing

$

24.

Books

$

25.

Stocks and bonds

$

26.

Investments in coins, stamps, paintings, or other collectibles

$

27.

Firearms, sports, photographic, and other hobby equipment

$

28.

Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts)

$

29.

Interest in a pension plan

$

30.

Interest in education accounts

$

31.

Cash value of life insurance

$

32.

Security deposits with landlords, utilities, and others

$

33.

Interests in partnerships

$

34.

Value of investment in a business

$

35.

Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options)

$

36.

Other assets not included above

$

37.

FMV of total assets immediately before the cancellation. Add lines 16 through 36.

$

Part III. Insolvency

38.

Amount of insolvency. Subtract line﻿ ﻿37 from line﻿ ﻿15. If zero or less, you aren't insolvent.

$

Don't include a canceled debt in income to the extent that you were insolvent immediately before the cancellation. You don’t qualify for the insolvency exclusion by being an owner of, or a partner in a partnership that owns, a grantor trust or disregarded entity that is insolvent. You must be insolvent to qualify for this exclusion. You were insolvent immediately before the cancellation to the extent that the total of all of your liabilities was more than the FMV of all of your assets immediately before the cancellation. For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets, which are beyond the reach of your creditors under the law, such as your interest in a pension plan and the value of your retirement account). Liabilities include:

The entire amount of recourse debt;

The amount of nonrecourse debt that isn't in excess of the FMV of the property that is security for the debt; and

The amount of nonrecourse debt in excess of the FMV of the property subject to the nonrecourse debt, to the extent nonrecourse debt in excess of the FMV of the property subject to the debt is forgiven.

You can use the Insolvency Worksheet to help calculate the extent that you were insolvent immediately before the cancellation.

Other exclusions must be applied before the insolvency exclusion.

This exclusion doesn't apply to a cancellation of debt that occurs in a title 11 bankruptcy case. It also doesn't apply if the debt is qualified principal residence indebtedness (defined in this section under Qualified Principal Residence Indebtedness, later) unless you elect to apply the insolvency exclusion instead of the qualified principal residence indebtedness exclusion.

How to report the insolvency exclusion.

To show that you are excluding canceled debt from income under the insolvency exclusion, attach Form 982 to your federal income tax return and check the box on line﻿ ﻿1b. On line﻿ ﻿2, include the smaller of the amount of the debt canceled or the amount by which you were insolvent immediately before the cancellation. You can use the Insolvency Worksheet to help calculate the extent that you were insolvent immediately before the cancellation. You must also reduce your tax attributes in Part II of Form 982, as explained under Reduction of Tax Attributes, later.

Example 1—amount of insolvency more than canceled debt. In 2023, you were released from an obligation to pay a personal credit card debt in the amount of $5,000. You received a 2023 Form 1099-C from the credit card lender showing the entire amount of discharged debt of $5,000 in box 2. None of the exceptions to the general rule that canceled debt is included in income apply. You use the Insolvency Worksheet to determine that the total liabilities immediately before the cancellation were $15,000 and the FMV of the total assets immediately before the cancellation was $7,000. This means that immediately before the cancellation, you were insolvent to the extent of $8,000 ($15,000 total liabilities minus $7,000 FMV of the total assets). Because the amount by which you were insolvent immediately before the cancellation was more than the amount of debt canceled, you can exclude the entire $5,000 canceled debt from income.

When completing the tax return, you check the box on line﻿ ﻿1b of Form 982 and enter $5,000 on line﻿ ﻿2. You complete Part II to reduce the tax attributes, as explained under Reduction of Tax Attributes, later. You don’t include any of the $5,000 canceled debt on Schedule 1 (Form 1040), line﻿ ﻿8c. None of the canceled debt is included in income.

Example 2—amount of insolvency less than canceled debt. The facts are the same as in Example 1, except that your total liabilities immediately before the cancellation were $10,000 and the FMV of the total assets immediately before the cancellation was $7,000. In this case, you are insolvent to the extent of $3,000 ($10,000 total liabilities minus $7,000 FMV of the total assets) immediately before the cancellation. Because the amount of the canceled debt was more than the amount by which you were insolvent immediately before the cancellation, you can exclude only $3,000 of the $5,000 canceled debt from income under the insolvency exclusion.

You check the box on line﻿ ﻿1b of Form 982 and include $3,000 on line﻿ ﻿2. Also, you complete Part II to reduce the tax attributes, as explained under Reduction of Tax Attributes, later. Additionally, you must include $2,000 of canceled debt on Schedule 1 (Form 1040), line﻿ ﻿8c (unless another exclusion applies).

Example 3—joint debt and separate returns. In 2023, you and your spouse were released from an obligation to pay a debt of $10,000 for which you were jointly and severally liable. None of the exceptions to the general rule that canceled debt is included in income apply. The debt (originally $12,000) was incurred to finance your purchase of a $9,000 motorcycle and your spouse's purchase of a laptop computer and software for personal use for $3,000. You each received a 2023 Form 1099-C from the bank showing the entire canceled debt of $10,000 in box 2. Based on the use of the loan proceeds, you both agreed that you were responsible for 75% of the debt and your spouse was responsible for the remaining 25%. Therefore, your share of the debt is $7,500 (75% of $10,000) and your spouse’s share is $2,500 (25% of $10,000). By completing the Insolvency Worksheet, you determine that, immediately before the cancellation of the debt, you were insolvent to the extent of $5,000 ($15,000 total liabilities minus $10,000 FMV of the total assets). You can exclude $5,000 of the $7,500 canceled debt. Your spouse completes a separate Insolvency Worksheet and determines your spouse was insolvent to the extent of $4,000 ($9,000 total liabilities minus $5,000 FMV of the total assets). Your spouse can exclude the entire canceled debt of $2,500.

When completing the separate tax return, you check the box on line﻿ ﻿1b of Form 982 and enter $5,000 on line﻿ ﻿2. You complete Part II to reduce the tax attributes, as explained under Reduction of Tax Attributes, later. You must include the remaining $2,500 (your $7,500 share of the canceled debt minus the $5,000 extent to which you were insolvent) of canceled debt on Schedule 1 (Form 1040), line﻿ ﻿8c (unless another exclusion applies).

When completing the return, your spouse checks the box on line﻿ ﻿1b of Form 982 and enters $2,500 on line﻿ ﻿2. Your spouse completes Part II to reduce the tax attributes, as explained under Reduction of Tax Attributes, later. Your spouse doesn’t include any of the canceled debt on Schedule 1 (Form 1040), line﻿ ﻿8c. None of the canceled debt has to be included in income.

Qualified Farm Indebtedness

You can exclude canceled farm debt from income on your 2023 return if all of the following apply.

The debt was incurred directly in connection with your operation of the trade or business of farming.

 50% or more of your total gross receipts for 2020, 2021, and 2022 were from the trade or business of farming.

The cancellation was made by a qualified person. A qualified person is an individual, organization, partnership, association, corporation, or other person who is actively and regularly engaged in the business of lending money. A qualified person also includes any federal, state, or local government or agency or instrumentality of one of those governments. For example, the U.S. Department of Agriculture is a qualified person. A qualified person can't be related to you, can't be the person from whom you acquired the property (or a person related to this person), and can't be a person who receives a fee due to your investment in the property (or a person related to this person).

 For the definition of the term “related person,” see Related persons under At-Risk Amounts in Pub. 925, Passive Activity and At-Risk Rules.

Other exclusions must be applied before the qualified farm indebtedness exclusion.

This exclusion doesn't apply to a cancellation of debt in a title 11 bankruptcy case or to the extent you were insolvent immediately before the cancellation. If qualified farm debt is canceled in a title 11 case, you must apply the bankruptcy exclusion rather than the exclusion for canceled qualified farm debt. If you were insolvent immediately before the cancellation of qualified farm debt, you must apply the insolvency exclusion before applying the exclusion for canceled qualified farm debt.

Exclusion limit.

The amount of canceled qualified farm debt you can exclude from income under this exclusion is limited. It can't be more than the sum of:

Your adjusted tax attributes, and

The total adjusted basis of qualified property you held at the beginning of 2024.

 If you excluded canceled debt under the insolvency exclusion, the adjusted basis of any qualified property and adjusted tax attributes are determined after any reduction of tax attributes required under the insolvency exclusion.

Any canceled qualified farm debt that is more than this limit must be included in your income.

For more information about the basis of property, see Pub. 551.

Adjusted tax attributes.

Adjusted tax attributes means the sum of the following items.

Any net operating loss (NOL) for 2023 and any NOL carryover to 2023.

Any net capital loss for 2023 and any capital loss carryover to 2023.

Any passive activity loss carryover from 2023.

Three times the sum of any:

General business credit carryover to or from 2023,

Minimum tax credit available as of the beginning of 2024,

Foreign tax credit carryover to or from 2023, and

Passive activity credit carryover from 2023.

Qualified property.

This is any property you use or hold for use in your trade or business or for the production of income.

How to report the qualified farm indebtedness exclusion.

To show that all or part of your canceled debt is excluded from income because it is qualified farm debt, check the box on line﻿ ﻿1c of Form 982 and attach it to your Form 1040 or 1040-SR. On line﻿ ﻿2 of Form 982, include the amount of the qualified farm debt canceled, but not more than the exclusion limit (explained earlier). You must also reduce your tax attributes in Part II of Form 982, as explained under Reduction of Tax Attributes, later.

Example 1—only qualified farm indebtedness exclusion applies. In 2023, you were released from an obligation to pay a $10,000 debt that was incurred directly in connection with the trade or business of farming. You received a Form 1099-C from the qualified lender showing discharged debt of $10,000 in box 2. For 2020, 2021, and 2022 tax years, at least 50% of your total gross receipts were from the trade or business of farming. Your adjusted tax attributes are $5,000 and you have $3,000 total adjusted basis in qualified property at the beginning of 2024. You had no other debt canceled during 2023 and no other exception or exclusion relating to canceled debt income applies.

You can exclude $8,000 ($5,000 of adjusted tax attributes plus $3,000 total adjusted basis in qualified property at the beginning of 2024) of the $10,000 canceled debt from income. You check the box on line﻿ ﻿1c of Form 982 and enter $8,000 on line﻿ ﻿2. Also, you complete Part II to reduce the tax attributes, as explained under Reduction of Tax Attributes, later. The remaining $2,000 of canceled qualified farm debt is included in your income on Schedule﻿ ﻿F (Form 1040), line﻿ ﻿8.

Example 2—both insolvency and qualified farm indebtedness exclusions apply. On March 2, 2023, you were released from an obligation to pay a $10,000 business credit card debt that was used directly in connection with a farming business. For 2020, 2021, and 2022 tax years, at least 50% of your total gross receipts were from the trade or business of farming. You received a 2023 Form 1099-C from the qualified lender showing discharged debt of $10,000 in box 2. The FMV of your total assets on March 2, 2023 (immediately before the cancellation of the credit card debt), was $7,000 and your total liabilities at that time were $11,000. Your adjusted tax attributes (a 2023 NOL) are $7,000 and you have $4,000 total adjusted basis in qualified property at the beginning of 2024.

You qualify to exclude $4,000 of the canceled debt under the insolvency exclusion because you are insolvent to the extent of $4,000 immediately before the cancellation ($11,000 total liabilities minus $7,000 FMV of total assets). You must reduce the tax attributes under the insolvency rules before applying the rules for qualified farm debt.

You also qualify to exclude the remaining $6,000 of canceled qualified farm debt. The limit on your exclusion from income of canceled qualified farm debt is $7,000, the sum of:

Your adjusted tax attributes of $3,000 (the $7,000 NOL minus the $4,000 reduction of tax attributes required because of the $4,000 exclusion of canceled debt under the insolvency exclusion), and

Your total adjusted basis of $4,000 in qualified property held at the beginning of 2024.

You check the boxes on lines 1b and 1c of Form 982 and enter $10,000 on line﻿ ﻿2. You complete Part II to reduce the tax attributes, as explained under Reduction of Tax Attributes, later. You don’t include any of the canceled debt in income.

Example 3—no qualified farm indebtedness exclusion when insolvent to the extent of canceled debt. The facts are the same as in Example 2, except that immediately before the cancellation, you were insolvent to the extent of the full $10,000 canceled debt. Because the exclusion for qualified farm debt doesn't apply to the extent that your insolvency (immediately before the cancellation) was equal to the full amount of the canceled debt, you check only the box on line﻿ ﻿1b of Form 982 and enter $10,000 on line﻿ ﻿2. You complete Part II to reduce the tax attributes based on the insolvency exclusion, as explained under Reduction of Tax Attributes, later. You don’t include any of the canceled debt in income.

Qualified Real Property Business Indebtedness

You can elect to exclude canceled qualified real property business indebtedness from income. Qualified real property business indebtedness is debt (other than qualified farm debt) that meets all of the following conditions.

It was incurred or assumed in connection with real property used in a trade or business. Real property used in a trade or business doesn’t include real property developed and held primarily for sale to customers in the ordinary course of business.

It is secured by that real property. As long as certain other requirements are met, indebtedness that is secured by 100% of the ownership interest in a disregarded entity holding real property will be treated as indebtedness that is secured by real property. For more information, and for the requirements that must be met, see Revenue Procedure 2014﻿-﻿20, available at IRS.gov/irb/2014﻿-﻿9_IRB#RP-2014﻿-﻿20.

It was incurred or assumed:

Before 1993; or

After 1992, if the debt is either (i) qualified acquisition indebtedness (defined next), or (ii) debt incurred to refinance qualified real property business debt incurred or assumed before 1993 (but only to the extent the amount of such debt doesn't exceed the amount of debt being refinanced).

It is debt to which you elect to apply these rules.

Residential rental property generally qualifies as real property used in a trade or business unless you also use the dwelling as a home. For more information, see Dwelling Unit Used as a Home in Pub. 527.

Definition of qualified acquisition indebtedness.

Qualified acquisition indebtedness is:

Debt incurred or assumed to acquire, construct, reconstruct, or substantially improve real property that is used in a trade or business and secures the debt; or

Debt resulting from the refinancing of qualified acquisition indebtedness, to the extent the amount of the debt doesn't exceed the amount of debt being refinanced.

Other exclusions must be applied before the qualified real property business indebtedness exclusion.

This exclusion doesn't apply to a cancellation of debt in a title 11 bankruptcy case or to the extent you were insolvent immediately before the cancellation. If qualified real property business debt is canceled in a title 11 bankruptcy case, you must apply the bankruptcy exclusion rather than the exclusion for canceled qualified real property business debt. If you were insolvent immediately before the cancellation of qualified real property business debt, you must apply the insolvency exclusion before applying the exclusion for canceled qualified real property business debt.

Exclusion limit.

The amount of canceled qualified real property business debt you can exclude from income under this exclusion has two limits. The amount you can exclude can't be more than either:

The excess (if any) of the outstanding principal amount of the qualified real property business debt (immediately before the cancellation) over the FMV (immediately before the cancellation) of the business real property securing the debt, or

The total adjusted basis of depreciable real property you held immediately before the cancellation of the qualified real property business debt (other than depreciable real property acquired in contemplation of the cancellation).

Note. When figuring the first limit in (1) above, reduce the FMV of the business real property securing the debt (immediately before the cancellation) by the outstanding principal amount of any other qualified real property business debt secured by that property (immediately before the cancellation). When figuring the second (overall) limit in (2) above, use the adjusted basis of the depreciable real property after any reductions in basis required because of the exclusion of debt canceled under the bankruptcy, insolvency, or farm debt provisions described in this publication or because of other basis adjustments that may apply to that depreciable property.

For more information about the basis of property, see Pub. 551.

How to elect the qualified real property business debt exclusion.

You must make an election to exclude canceled qualified real property business debt from gross income. The election must be made on a timely filed federal income tax return (including extensions) for 2023 and can be revoked only with IRS consent. The election is made by completing Form 982 in accordance with its instructions. Attach Form 982 to your federal income tax return for 2023 and check the box on line 1d. Include the amount of canceled qualified real property business debt (but not more than the amount of the exclusion limit, explained earlier) on line﻿ ﻿2 of Form 982. You must also reduce your tax attributes in Part II of Form 982, as explained under Reduction of Tax Attributes, later.

If you timely filed your tax return without making this election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Enter “Filed pursuant to section 301.9100﻿-﻿2” on the amended return and file it at the same place you filed the original return.

Example—full qualified real property business indebtedness exclusion. In 2017, you bought a retail store for use in a business that you operated as a sole proprietorship. You made a $20,000 down payment and financed the remaining $200,000 of the purchase price with a bank loan. The bank loan was a recourse loan and was secured by the property. You used the property in the business continuously since it was purchased. You had no other debt secured by that depreciable real property. In addition to the retail store, you owned depreciable equipment and furniture with an adjusted basis of $50,000.

Your business encountered financial difficulties in 2023. On September 21, 2023, the bank financing the retail store loan entered into a workout agreement with you under which it canceled $20,000 of the debt. Immediately before the cancellation, the outstanding principal balance on the retail store loan was $185,000, the FMV of the store was $165,000, and the adjusted basis was $210,000 ($220,000 cost minus $10,000 accumulated depreciation).

The bank sent you a 2023 Form 1099-C showing discharged debt of $20,000 in box 2. You had no tax attributes other than the basis to reduce and you didn’t qualify for any exception or exclusion other than the qualified real property business debt exclusion.

You elect to apply the qualified real property business debt exclusion to the canceled debt. The amount of canceled qualified real property business debt that you can exclude from income is limited. The amount you can exclude can’t be more than either:

 $20,000 (the excess of the $185,000 outstanding principal amount of your qualified real property business debt immediately before the cancellation over the $165,000 FMV of the business real property securing the debt), or

$210,000 (the total adjusted basis of the depreciable real property you held immediately before the cancellation).

.

Thus, you can exclude the entire $20,000 of canceled qualified real property business debt from income. You check the box on line﻿ ﻿1d of Form 982 and enter $20,000 on line﻿ ﻿2. You must also use line﻿ ﻿4 of Form 982 to reduce the basis in depreciable real property by the $20,000 of canceled qualified real property business debt excluded from income, as explained under Reduction of Tax Attributes, later.

Qualified Principal Residence Indebtedness

Qualified principal residence indebtedness is any mortgage you took out to buy, build, or substantially improve your main home. It must also be secured by your main home. Qualified principal residence indebtedness also includes any debt secured by your main home that you used to refinance a mortgage you took out to buy, build, or substantially improve your main home, but only up to the amount of the old mortgage principal just before the refinancing.

Example 1—qualified principal residence indebtedness amount after refinance. In 2022, you bought a main home for $315,000. You took out a $300,000 mortgage loan to buy the home and made a down payment of $15,000. The loan was secured by the home. Later that year, you took out a second mortgage loan in the amount of $50,000 that was used to add a garage to the home.

In 2023, when the outstanding principal of the first and second mortgage loans was $325,000, you refinanced the two loans into one loan in the amount of $400,000. The FMV of the home at the time of the refinancing was $430,000. You used the additional $75,000 debt proceeds ($400,000 new mortgage loan minus $325,000 outstanding principal balances of the first and second mortgage loans immediately before the refinancing) to pay off personal credit cards and to pay college tuition for your daughter.

After the refinancing, your qualified principal residence indebtedness is $325,000 because the $400,000 debt resulting from the refinancing is qualified principal residence indebtedness only to the extent it isn't more than the old mortgage principal just before the refinancing (the $325,000 of outstanding principal on your first and second mortgages, which both qualified as principal residence indebtedness).

Example 2—refinancing home equity loan used for other purposes. In 2022, you acquired a main home for $200,000, subject to a mortgage of $175,000. Later that year, you took out a home equity loan for $10,000, secured by the main home, which you used to pay off personal credit cards.

In 2023, when the outstanding principal on the mortgage was $170,000, and the outstanding principal on the home equity loan was $9,000, you refinanced the two loans into one loan in the amount of $200,000. The FMV of the home at the time of refinancing was $210,000. You used the additional $21,000 ($200,000 new mortgage loan minus $179,000 outstanding principal balances on the mortgage and home equity loan) to cover medical expenses.

After refinancing, your qualified principal residence indebtedness is $170,000 because the debt resulting from the refinancing is qualified principal residence indebtedness only to the extent it refinances debt that had been secured by the main home and was used to buy, build, or substantially improve the main home.

Main home.

Your main home is the one in which you live most of the time. You can have only one main home at any one time.

Other exclusions must be applied before the qualified principal residence indebtedness exclusion.

This exclusion doesn't apply to a cancellation of debt in a title 11 bankruptcy case. If qualified principal residence indebtedness is canceled in a title 11 bankruptcy case, you must apply the bankruptcy exclusion rather than the exclusion for qualified principal residence indebtedness. If you were insolvent immediately before the cancellation, you can elect to apply the insolvency exclusion (as explained under Insolvency, earlier) instead of applying the qualified principal residence indebtedness exclusion. To do this, check the box on line 1b of Form 982 instead of the box on line﻿ ﻿1e.

Exclusion limit.

The maximum amount you can treat as qualified principal residence indebtedness is $750,000 ($375,000 if married filing separately). You can't exclude canceled qualified principal residence indebtedness from income if the cancellation was for services performed for the lender or on account of any other factor not directly related to a decline in the value of your home or to your financial condition.

Ordering rule.

If only a part of a loan is qualified principal residence indebtedness, the exclusion applies only to the extent the amount canceled is more than the amount of the loan (immediately before the cancellation) that isn’t qualified principal residence indebtedness. The remaining part of the loan may qualify for another exclusion.

Example 3—ordering rule on cancellation of nonqualified principal residence debt. You incurred recourse debt of $800,000 when you bought a main home for $880,000. When the FMV of the property was $1 million, you refinanced the debt for $850,000. At the time of the refinancing, the principal balance of the original mortgage loan was $740,000. You used the $110,000 obtained from the refinancing ($850,000 minus $740,000) to pay off credit cards and to buy a new car.

About 2 years after the refinancing, you lost your job and were unable to get another job paying a comparable salary. Your home had declined in value to between $600,000 and $650,000. Based on your circumstances, the lender agreed to allow a short sale of the property for $620,000 and to cancel the remaining $115,000 of the outstanding $735,000 debt. Under the ordering rule, you can exclude only $5,000 of the canceled debt from income under the exclusion for canceled qualified principal residence indebtedness ($115,000 canceled debt minus the $110,000 amount of the debt that wasn't qualified principal residence indebtedness). You must include the remaining $110,000 of canceled debt in income on Schedule 1 (Form 1040), line﻿ ﻿8c (unless another exclusion applies).

How to report the qualified principal residence indebtedness exclusion.

To show that all or part of your canceled debt is excluded from income because it is qualified principal residence indebtedness, attach Form 982 to your federal income tax return and check the box on line﻿ ﻿1e. On line﻿ ﻿2 of Form 982, include the amount of canceled qualified principal residence indebtedness, but not more than the amount of the exclusion limit (explained earlier). If you continue to own your home after a cancellation of qualified principal residence indebtedness, you must reduce your basis in the home, as explained under Reduction of Tax Attributes next.

Reduction of Tax Attributes

If you exclude canceled debt from income, you must reduce certain tax attributes (but not below zero) by the amount excluded. Use Part II of Form 982 to reduce your tax attributes. The order in which the tax attributes are reduced depends on the reason the canceled debt was excluded from income. If the total amount of canceled debt excluded from income (line﻿ ﻿2 of Form 982) was more than your total tax attributes, the total reduction of tax attributes in Part II of Form 982 will be less than the amount on line﻿ ﻿2.

Qualified Principal Residence Indebtedness

If you exclude canceled qualified principal residence indebtedness from income and you continue to own the home after the cancellation, you must reduce the basis of the home (but not below zero) by the amount of the canceled qualified principal residence indebtedness excluded from income. Enter the amount of the basis reduction on line﻿ ﻿10b of Form 982.

For more details on determining the basis of your main home, see Pub. 523.

Bankruptcy and Insolvency

No tax attributes other than basis of personal-use property.

If the canceled debt you are excluding isn't excluded as qualified principal residence indebtedness and you have no tax attributes other than the adjusted basis of personal-use property (see the list of seven tax attributes, later), you must reduce the basis of the personal-use property you held at the beginning of 2024 (in proportion to adjusted basis). Personal-use property is any property that isn't used in your trade or business or held for investment (such as your home, home furnishings, and car). Include on line﻿ ﻿10a of Form 982 the smallest of:

The basis of your personal-use property held at the beginning of 2024,

The amount of canceled nonbusiness debt (other than qualified principal residence indebtedness) that you are excluding from income on line﻿ ﻿2 of Form 982, or

The excess of the total basis of the property and the amount of money you held immediately after the cancellation over your total liabilities immediately after the cancellation.

For more information about the basis of property, see Pub. 551.

Example. In 2022, you bought a car for personal use. The cost of the car was $12,000. You put down $2,000 and took out a loan of $10,000 to buy the car. The loan was a recourse loan, meaning that you were personally liable for the full amount of the debt.

On December 7, 2023, when the balance of the loan was $8,500, the lender repossessed and sold the car because you stopped making payments on the loan. The FMV of the car was $7,000 at the time the lender repossessed and sold it. The lender applied the $7,000 it received on the sale of the car against your loan and forgave the remaining loan balance of $1,500 ($8,500 outstanding balance immediately before the repossession minus the $7,000 FMV of the car).

Your only other assets at the time of the cancellation are the furniture in your apartment, which has a basis of $5,000 and an FMV of $3,000; jewelry with a basis of $500 and an FMV of $1,000; and a $600 balance in a savings account. Thus, the FMV of your total assets immediately before the cancellation was $11,600 ($7,000 car plus $3,000 furniture plus $1,000 jewelry plus $600 savings). You also had an outstanding student loan balance of $6,000 immediately before the cancellation, bringing the total liabilities at that time to $14,500 ($8,500 balance on car loan plus $6,000 student loan balance). Other than the car, which was repossessed, you held all of these assets at the beginning of 2024. The FMV and basis of the assets remained the same at the beginning of 2024.

You received a 2023 Form 1099-C showing $1,500 in box 2 (amount of debt that was canceled) and $7,000 in box 7 (FMV of the property). You can exclude all $1,500 of canceled debt from income because at the time of the cancellation, you were insolvent to the extent of $2,900 ($14,500 of total liabilities immediately before the cancellation minus $11,600 FMV of total assets at that time).

You check box 1b on Form 982 and enter $1,500 on line﻿ ﻿2. You enter $100 on line﻿ ﻿10a, the smallest of:

The $5,500 basis of your personal-use property held at the beginning of 2024 ($5,000 furniture plus $500 jewelry),

The $1,500 nonbusiness debt you are excluding from income on line﻿ ﻿2 of Form 982, or

The $100 excess of the total basis of the property and the amount of money you held immediately after the cancellation over the total liabilities at that time ($5,500 basis of property held immediately after the cancellation plus $600 savings minus $6,000 student loan).

You must reduce (by one dollar for each dollar of excluded canceled debt) the basis in each item of property held at the beginning of 2024 in proportion to the total adjusted basis in all the property. The total reduction, however, can't be more than (3) above—the $100 excess of the total adjusted basis and the money held after the cancellation over the total liabilities after the cancellation. See the basis attribute under All other tax attributes next.

Thus, you reduce the basis as follows.

The furniture's basis is 91% of the total adjusted basis ($5,000 divided by $5,500), so you reduce it by $91 (the $100 excess in (3) multiplied by 0.91).

The jewelry’s basis is 9% of the total adjusted basis ($500 divided by $5,500), so you reduce it by $9 (the $100 excess in (3) multiplied by 0.09).

All other tax attributes.

If the canceled debt is excluded by reason of the bankruptcy or insolvency exclusion, you must use the excluded debt to reduce the following tax attributes (but not below zero) in the order listed unless you elect to reduce the basis of depreciable property first, as explained later. Reduce your tax attributes after you figure your income tax liability for 2023.

Net operating loss (NOL). First reduce any 2023 NOL and then reduce any NOL carryover to 2023 (after taking into account any amount used to reduce 2023 taxable income) in the order of the tax years from which the carryovers arose, starting with the earliest year. Reduce the NOL or carryover by one dollar for each dollar of excluded canceled debt.

General business credit carryover. Reduce the credit carryover to or from 2023. Reduce the credit carryovers to 2023 in the order in which they are taken into account for 2023. For more information on the credit ordering rules for 2023, see the Instructions for Form 3800. Reduce the carryover by 33﻿ ﻿1﻿/﻿3 cents for each dollar of excluded canceled debt.

Minimum tax credit. Reduce the minimum tax credit available at the beginning of 2024. Reduce the credit by 33﻿ ﻿1﻿/﻿3 cents for each dollar of excluded canceled debt.

Net capital loss and capital loss carryovers. First reduce any 2023 net capital loss and then any capital loss carryover to 2023 (after taking into account any amount used to reduce 2023 taxable income) in the order of the tax years from which the carryovers arose, starting with the earliest year. Reduce the net capital loss or carryover by one dollar for each dollar of excluded canceled debt.

Basis. Reduce the basis of the property you hold at the beginning of 2024 in the following order (and, within each category, in proportion to adjusted basis).

Real property used in your trade or business or held for investment (other than real property held for sale to customers in the ordinary course of business) if it secured the canceled debt.

Personal property used in your trade or business or held for investment (other than inventory and accounts and notes receivable) if it secured the canceled debt.

Any other property used in your trade or business or held for investment (other than inventory, accounts receivable, notes receivable, and real property held for sale to customers in the ordinary course of business).

Inventory, accounts receivable, notes receivable, and real property held primarily for sale to customers in the ordinary course of business.

Personal-use property (property not used in your trade or business nor held for investment).

Reduce the basis by one dollar for each dollar of excluded canceled debt. However, the reduction can't be more than the excess of the total basis of the property and the amount of money you held immediately after the debt cancellation over your total liabilities immediately after the cancellation.

For allocation rules that apply to basis reductions for multiple canceled debts, see Regulations section 1.1017﻿-﻿1(b)(2). Also see Election to reduce the basis of depreciable property before reducing other tax attributes, later.

Passive activity loss and credit carryovers. Reduce the passive activity loss and credit carryovers from 2023. Reduce the loss carryover by one dollar for each dollar of excluded canceled debt. Reduce the credit carryover by 33﻿ ﻿1﻿/﻿3 cents for each dollar of excluded canceled debt.

Foreign tax credit. Reduce the credit carryover to or from 2023. Reduce the credit carryovers to 2023 in the order in which they are taken into account for 2023. Reduce the carryover by 33﻿ ﻿1﻿/﻿3 cents for each dollar of excluded canceled debt.

Election to reduce the basis of depreciable property before reducing other tax attributes.

You can elect to reduce the basis of depreciable property you held at the beginning of 2024 before reducing other tax attributes. You can reduce the basis of this property by all or part of the canceled debt. Basis of property is reduced in the following order.

Depreciable real property used in your trade or business or held for investment that secured the canceled debt.

Depreciable personal property used in your trade or business or held for investment that secured the canceled debt.

Other depreciable property used in your trade or business or held for investment.

Real property held primarily for sale to customers if you elect to treat it as if it were depreciable property on Form 982.

Basis reduction is limited to the total adjusted basis of all your depreciable property. Depreciable property for this purpose means any property subject to depreciation or amortization, but only if a reduction of basis will reduce the depreciation or amortization otherwise allowable for the period immediately following the basis reduction. If the amount of canceled debt excluded from income is more than the total basis in depreciable property, you must use the excess to reduce the other tax attributes in the order described earlier under All other tax attributes. In figuring the limit on the basis reduction in (5), Basis, use the remaining adjusted basis of your properties after making this election. See Form 982 for information on how to make this election. The election can be revoked only with IRS consent.

Recapture of basis reductions.

If you reduce the basis of property under these provisions and later sell or otherwise dispose of the property at a gain, the part of the gain due to this basis reduction is taxable as ordinary income under the depreciation recapture provisions. Treat any property that isn't section 1245 or section 1250 property as section 1245 property. For section 1250 property, determine the depreciation adjustments that would have resulted under the straight line method as if there were no basis reduction for debt cancellation. See Pub. 544, or Pub. 225, for more details on sections 1245 and 1250 property and the recapture of gain as ordinary income.

Qualified Farm Indebtedness

If you exclude canceled debt from income under both the insolvency exclusion and the exclusion for qualified farm indebtedness, you must first reduce your tax attributes by the amount excluded under the insolvency exclusion. Then, reduce your remaining tax attributes (but not below zero) by the amount of canceled debt that qualifies for the farm debt exclusion.

In most cases, when reducing your tax attributes for canceled qualified farm indebtedness excluded from income, reduce them in the same order explained under Bankruptcy and Insolvency, earlier. However, don't follow the rules in item (5), Basis. Instead, reduce only the basis of qualified property. Qualified property is any property you use or hold for use in your trade or business or for the production of income. Reduce the basis of qualified property in the following order.

Depreciable qualified property. You can elect on Form 982 to treat real property held primarily for sale to customers as if it were depreciable property.

Land that is qualified property and is used or held for use in your farming business.

Other qualified property.

Qualified Real Property Business Indebtedness

If you make an election to exclude canceled qualified real property business debt from income, you must reduce the basis of your depreciable real property (but not below zero) by the amount of canceled qualified real property business debt excluded from income. The basis reduction is made at the beginning of 2024. However, if you dispose of your depreciable real property before the beginning of 2024, you must reduce its basis (but not below zero) immediately before the disposition. Enter the amount of the basis reduction on line﻿ ﻿4 of Form 982.

Example 1—qualified real property business indebtedness and insolvency with reduction in basis. In 2018, you bought a retail store for use in a business operated as a sole proprietorship. You made a $20,000 down payment and financed the remaining $200,000 of the purchase price with a bank loan. The bank loan was a recourse loan and was secured by the property. You used the property in the business continuously since it was purchased and had no other debt secured by that depreciable real property. In addition to the retail store, you owned depreciable equipment and furniture with an adjusted basis of $50,000. Your tax attributes included the basis of depreciable property, an NOL, and a capital loss carryover to 2023.

Your business encountered financial difficulties in 2023. On September 21, 2023, the bank financing the retail store loan entered into a workout agreement with you under which it canceled $20,000 of the principal amount of the debt. Immediately before the bank entered into the workout agreement, you were insolvent to the extent of $12,000. At that time, the outstanding principal balance on the retail store loan was $185,000, the FMV of the store was $165,000, and the adjusted basis was $210,000 ($220,000 cost minus $10,000 accumulated depreciation). The bank sent you a 2023 Form 1099-C showing canceled debt of $20,000 in box 2.

You must apply the insolvency exclusion before applying the exclusion for canceled qualified real property business indebtedness. Under the insolvency exclusion rules, you can exclude $12,000 of the canceled debt from income. You elect to reduce the basis of depreciable property before reducing other tax attributes. Under that election, you must first reduce the basis in the depreciable real property used in the trade or business that secured the canceled debt. After the basis reduction, the adjusted basis in that property is $198,000 ($210,000 adjusted basis before entering into the workout agreement minus $12,000 of canceled debt excluded from income under the insolvency exclusion).

You may be able to exclude the remaining $8,000 of canceled debt from income under the exclusion for qualified real property business indebtedness, if you elect to apply it. The amount you can exclude is limited. It can’t be more than:

$20,000 (the excess of the $185,000 outstanding principal amount of your qualified real property business debt (immediately before the cancellation) over the $165,000 FMV (immediately before the cancellation) of the qualified real property, which secured the debt), or

$198,000 (the total adjusted basis of depreciable real property you held immediately before the cancellation determined after reductions for accumulated depreciation and canceled debt excluded under the insolvency exclusion ($220,000 minus $10,000 minus $12,000)).

 Since both limits are more than the $8,000 of remaining canceled debt ($20,000 minus $12,000), you can exclude $8,000 under the qualified real property business indebtedness exclusion.

You check the boxes on lines 1b and 1d of Form 982. You complete Part II of Form 982 to reduce the basis in the depreciable real property by $20,000, the amount of the canceled debt excluded from income. You enter $8,000 on line﻿ ﻿4 and $12,000 on line﻿ ﻿5.

Example 2—qualified real property business indebtedness with insolvency and reduction in NOL. You own depreciable real property used in a retail business. Your adjusted basis in the property is $145,000. The FMV of the property is $120,000. The property is subject to $134,000 of recourse debt, which is secured by the property. You had no other debt secured by that depreciable real property. You also had a $15,000 NOL in 2023.

During 2023, you entered into a workout agreement with the lender under which the lender canceled $14,000 of the debt on the real property used in the business. Immediately before the cancellation, you were insolvent to the extent of $10,000. You exclude $10,000 of the canceled debt from income under the insolvency exclusion. As a result of that exclusion, you reduce the NOL by $10,000.

You may be able to exclude the remaining $4,000 of canceled debt from income under the qualified real property business indebtedness exclusion, if you elect to apply it. The amount you can exclude is limited. It can't be more than:

$14,000 (the excess of the $134,000 outstanding principal amount of your qualified real property business debt (immediately before the cancellation) over the $120,000 FMV (immediately before the cancellation) of that qualified real property, which secured the debt), or

$145,000 (the total adjusted basis of depreciable real property held immediately before the cancellation of debt).

Since both limits ($14,000 and $145,000) are more than the remaining $4,000 of canceled debt, you can also exclude the remaining $4,000 of canceled debt.

You check the boxes on lines 1b and 1d of Form 982 and enter $14,000 on line﻿ ﻿2. You complete Part II of Form 982 to reduce the basis of depreciable real property and the 2023 NOL by entering $4,000 on line﻿ ﻿4 and $10,000 on line﻿ ﻿6. None of the canceled debt is included in income.

2.

Foreclosures and Repossessions

If you don't make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. The foreclosure or repossession is treated as a sale from which you may realize gain or loss. This is true even if you voluntarily return the property to the lender. If the outstanding loan balance was more than the FMV of the property and the lender cancels all or part of the remaining loan balance, you may also realize ordinary income from the cancellation of debt. You must report this income on your return unless certain exceptions or exclusions apply. See chapter﻿ ﻿1 for more details.

Borrower's gain or loss.

You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale. The gain is the difference between the amount realized and your adjusted basis in the transferred property (amount realized minus adjusted basis). The loss is the difference between your adjusted basis in the transferred property and the amount realized (adjusted basis minus amount realized). For more information on figuring gain or loss from the sale of property, see Gain or Loss From Sales and Exchanges in Pub. 544.

You can use Table 1﻿-﻿1 to figure your ordinary income from the cancellation of debt and your gain or loss from a foreclosure or repossession.

Amount realized and ordinary income on a recourse debt.

If you are personally liable for the debt, the amount realized on the foreclosure or repossession includes the smaller of:

The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or

The FMV of the transferred property.

 The amount realized also includes any proceeds you received from the foreclosure sale. If the FMV of the transferred property is less than the total outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, the difference is ordinary income from the cancellation of debt. You must report this income on your return unless certain exceptions or exclusions apply. See chapter﻿ ﻿1 for more details.

Example 1. In 2022, you paid $200,000 for a home. You made a $15,000 down payment and borrowed the remaining $185,000 from a bank. You are personally liable for the mortgage loan and the house secures the loan. In 2023, the bank foreclosed on the mortgage because you stopped making payments. When the bank foreclosed the mortgage, the balance due was $180,000, the FMV of the house was $170,000, and your adjusted basis was $175,000 due to a casualty loss that was deducted. At the time of the foreclosure, the bank forgave $2,000 of the $10,000 debt in excess of the FMV ($180,000 minus $170,000). You remained personally liable for the $8,000 balance.

In this case, you have ordinary income from the cancellation of debt in the amount of $2,000. The $2,000 income from the cancellation of debt is figured by subtracting the $170,000 FMV of the house from the $172,000 difference between the total outstanding debt immediately before the transfer of property and the amount for which you remain personally liable immediately after the transfer ($180,000 minus $8,000). You are able to exclude the $2,000 of canceled debt from income under the qualified principal residence indebtedness rules, discussed earlier.

You must also determine the gain or loss from the foreclosure. In this case, the amount realized is $170,000. This is the smaller of:

$172,000 (the $180,000 of outstanding debt immediately before the transfer minus $8,000 for which you remain personally liable immediately after the transfer), or

$170,000 (the FMV of the house).

You figure the gain or loss on the foreclosure by comparing the $170,000 amount realized with the $175,000 adjusted basis. You have a $5,000 nondeductible loss.

Example 2. You bought a new car for $15,000. You made a $2,000 down payment and borrowed the remaining $13,000 from the dealer's credit company. You are personally liable for the loan (recourse debt) and the car is pledged as security for the loan. On August 3, 2023, the credit company repossessed the car because you stopped making loan payments. The balance due after taking into account the payments you made was $10,000. The FMV of the car when it was repossessed was $9,000. On November 16, 2023, the credit company forgave the remaining $1,000 balance on the loan due to insufficient assets.

In this case, the amount you realize is $9,000. This is the smaller of:

$9,000 (the $10,000 outstanding debt immediately before the repossession minus the $1,000 for which you remain personally liable immediately after the repossession), or

$9,000 (the FMV of the car).

You figure the gain or loss on the repossession by comparing the $9,000 amount realized with the $15,000 adjusted basis. You have a $6,000 nondeductible loss. After the cancellation of the remaining balance on the loan in November, you also have ordinary income from cancellation of debt in the amount of $1,000 (the remaining balance on the $10,000 loan after the $9,000 amount satisfied by the FMV of the repossessed car). You must report the $1,000 on the return unless one of the exceptions or exclusions described in chapter﻿ ﻿1 applies.

Keep for Your Records Keep for Your Records

T﻿a﻿b﻿l﻿e﻿ ﻿1﻿-﻿1﻿.

Worksheet for Foreclosures and Repossessions

Part 1. Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Otherwise, go to Part 2.

1.

Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property

2.

Enter the fair market value of the transferred property

3.

Ordinary income from the cancellation of debt upon foreclosure or repossession.* Subtract line﻿ ﻿2 from line﻿ ﻿1. If less than zero, enter zero. Next, go to Part 2

Part 2. Gain or loss from foreclosure or repossession.

4.

Enter the smaller of line﻿ ﻿1 or line﻿ ﻿2. If you didn't complete Part 1 (because you weren't personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property

5.

Enter any proceeds you received from the foreclosure sale

6.

Add line﻿ ﻿4 and line﻿ ﻿5

7.

Enter the adjusted basis of the transferred property

8.

Gain or loss from foreclosure or repossession. Subtract line﻿ ﻿7 from line﻿ ﻿6

* The income may not be taxable. See chapter﻿ ﻿1 for more details.

Amount realized on a nonrecourse debt.

If you aren't personally liable for repaying the debt secured by the transferred property, the amount you realize includes the full amount of the outstanding debt immediately before the transfer. This is true even if the FMV of the property is less than the outstanding debt immediately before the transfer.

Example 1. You paid $200,000 for a home. You made a $15,000 down payment and borrowed the remaining $185,000 from a bank. You aren’t personally liable for the loan, but the loan was secured by a mortgage on the house.

The bank foreclosed on the mortgage because you stopped making payments. When the bank foreclosed on the mortgage, the balance due was $180,000, the FMV of the house was $170,000, and your adjusted basis was $175,000 due to a casualty loss that was deducted.

The amount you realized on the foreclosure is $180,000, the outstanding debt immediately before the foreclosure. You figure the gain or loss by comparing the $180,000 amount realized with the $175,000 adjusted basis. You have a $5,000 realized gain. See Pub. 523, to figure and report any taxable amount.

Example 2. You bought a new car for $15,000. You made a $2,000 down payment and borrowed the remaining $13,000 from the dealer's credit company. You aren’t personally liable for the loan (nonrecourse), but pledged the new car as security for the loan.

On August 3, 2023, the credit company repossessed the car because you stopped making loan payments. The balance due after taking into account the payments you made was $10,000. The FMV of the car when it was repossessed was $9,000.

The amount you realized on the repossession is $10,000. That is the outstanding amount of debt immediately before the repossession, even though the FMV of the car is less than $10,000. You figure the gain or loss on the repossession by comparing the $10,000 amount realized with the $15,000 adjusted basis. You have a $5,000 nondeductible loss.

Forms 1099-A and 1099-C.

A lender who acquires an interest in your property in a foreclosure or repossession should send you Form 1099-A, Acquisition or Abandonment of Secured Property, showing information you need to figure your gain or loss. However, if the lender also cancels part of your debt and must file Form 1099-C, the lender can include the information about the foreclosure or repossession on that form instead of on Form 1099-A. The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or other applicable entity, as discussed earlier in chapter﻿ ﻿1. For foreclosures or repossessions occurring in 2023, these forms should be sent to you by January 31, 2024.

3.

Abandonments

You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership but without passing it on to anyone else. Whether an abandonment has occurred is determined in light of all the facts and circumstances. You must both show an intention to abandon the property and affirmatively act to abandon the property.

A voluntary conveyance of the property in lieu of foreclosure isn’t an abandonment and is treated as the exchange of property to satisfy a debt. For more information, see Sales and Exchanges in Pub. 544.

The tax consequences of abandonment of property that secures a debt depend on whether you were personally liable for the debt (recourse debt) or weren’t personally liable for the debt (nonrecourse debt).

See Pub. 544 if you abandoned property that didn't secure debt. This publication only discusses the tax consequences of abandoning property that secured a debt.

Abandonment of property securing recourse debt.

In most cases, if you abandon property that secures debt for which you are personally liable (recourse debt), you don't have gain or loss until the later foreclosure is completed. For details on figuring gain or loss on the foreclosure, see chapter﻿ ﻿2.

Example 1—abandonment of personal-use property securing recourse debt. In 2019, you purchased a home for $200,000. You borrowed the entire purchase price, for which you were personally liable, and gave the bank a mortgage on the home. In 2023, you lost your job and was unable to continue making the mortgage loan payments. Because your mortgage loan balance was $185,000 and the FMV of the home was only $150,000, you decided to abandon the home by permanently moving out on August 1, 2023. Because you were personally liable for the debt and the bank didn't complete a foreclosure of the property in 2023, you have neither gain nor loss in tax year 2023 from abandoning the home. If the bank sells the house at a foreclosure sale in 2024, you will have to figure the gain or nondeductible loss for tax year 2024, as discussed earlier in chapter﻿ ﻿2.

Example 2—abandonment of business or investment property securing recourse debt. In 2019, you purchased business property for $200,000. You borrowed the entire purchase price, for which you were personally liable, and gave the lender a security interest in the property. In 2023, you were unable to continue making the loan payments. Because the loan balance was $185,000 and the FMV of the property was only $150,000, you abandoned the property on August 1, 2023. Because you were personally liable for the debt and the lender didn't complete a foreclosure of the property in 2023, you have neither gain nor loss in tax year 2023 from abandoning the property. If the lender sells the property at a foreclosure sale in 2024, you will have to figure the gain or deductible loss for tax year 2024, as discussed earlier in chapter﻿ ﻿2.

Abandonment of property securing nonrecourse debt.

If you abandon property that secures debt for which you aren't personally liable (nonrecourse debt), the abandonment is treated as a sale or exchange.

The amount you realize on the abandonment of property that secured nonrecourse debt is the amount of the nonrecourse debt. If the amount you realize is more than your adjusted basis, then you have a gain. If your adjusted basis is more than the amount you realize, then you have a loss. For more information on how to figure gain and loss, see Gain or Loss From Sales and Exchanges in Pub. 544.

Loss from abandonment of business or investment property is deductible as a loss. The character of the loss depends on the character of the property. The amount of deductible capital loss may be limited. For more information, see Treatment of Capital Losses in Pub. 544. You can't deduct any loss from abandonment of your home or other property held for personal use.

Example 1—abandonment of personal-use property securing nonrecourse debt. In 2019, you purchased a home for $200,000. You borrowed the entire purchase price, for which you weren’t personally liable, and gave the bank a mortgage on the home. In 2023, you lost your job and was unable to continue making the mortgage loan payments. Because the mortgage loan balance was $185,000 and the FMV of the home was only $150,000, you decided to abandon the home by permanently moving out on August 1, 2023. Because you weren’t personally liable for the debt, the abandonment is treated as a sale or exchange of the home in tax year 2023. Your amount realized is $185,000 and the adjusted basis in the home is $200,000. You have a $15,000 nondeductible loss in tax year 2023. (Had your adjusted basis been less than the amount realized, you would have had a gain that would have to be included in gross income.) The bank sells the house at a foreclosure sale in 2024. You have neither gain nor loss from the foreclosure sale. Because you weren’t personally liable for the debt, you also have no cancellation of debt income.

Example 2—abandonment of business or investment property securing nonrecourse debt. In 2019, you purchased business property for $200,000. You borrowed the entire purchase price, for which you weren’t personally liable, and gave the lender a security interest in the property. In 2023, you were unable to continue making the loan payments. Because the loan balance was $185,000 and the FMV of the property was only $150,000, you decided to abandon the property on August 3, 2023. Because you weren’t personally liable for the debt, the abandonment is treated as a sale or exchange of the property in tax year 2023. Your amount realized is $185,000 and the adjusted basis in the property is $180,000 (as a result of $20,000 of depreciation deductions on the property). You have a $5,000 gain in tax year 2023. (Had your adjusted basis been greater than the amount realized, you would have had a deductible loss.) The lender sells the property at a foreclosure sale in 2024. You have neither gain nor loss from the foreclosure sale. Because you weren’t personally liable for the debt, you also have no cancellation of debt income.

Canceled debt.

If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you will realize ordinary income equal to the canceled debt. This income is separate from any amount realized from abandonment of the property. You must report this income on your return unless one of the exceptions or exclusions described in chapter﻿ ﻿1 applies.

Forms 1099-A and 1099-C.

In most cases, if you abandon:

Real property (such as a home),

Intangible property, or

Tangible personal property held (wholly or partly) for use in a trade or business or for investment

that secures a loan and the lender knows the property has been abandoned, the lender should send you Form 1099-A showing information you need to figure your gain or loss from the abandonment. Also, if your debt is canceled and the lender must file Form 1099-C, the lender can include the information about the abandonment on that form instead of on Form 1099-A. The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or other applicable entity, as discussed earlier in chapter﻿ ﻿1.

For abandonments of property and debt cancellations occurring in 2023, these forms should be sent to you by January 31, 2024.

How To Get Tax Help

If you have questions about a tax issue; need help preparing your tax return; or want to download free publications, forms, or instructions, go to IRS.gov to find resources that can help you right away.

Preparing and filing your tax return.

After receiving all your wage and earnings statements (Forms W-2, W-2G, 1099-R, 1099-MISC, 1099-NEC, etc.); unemployment compensation statements (by mail or in a digital format) or other government payment statements (Form 1099-G); and interest, dividend, and retirement statements from banks and investment firms (Forms 1099), you have several options to choose from to prepare and file your tax return. You can prepare the tax return yourself, see if you qualify for free tax preparation, or hire a tax professional to prepare your return.

Free options for tax preparation.

Your options for preparing and filing your return online or in your local community, if you qualify, include the following.

Free File. This program lets you prepare and file your federal individual income tax return for free using software or Free File Fillable Forms. However, state tax preparation may not be available through Free File. Go to IRS.gov/FreeFile to see if you qualify for free online federal tax preparation, e-filing, and direct deposit or payment options.

VITA. The Volunteer Income Tax Assistance (VITA) program offers free tax help to people with low-to-moderate incomes, persons with disabilities, and limited-English-speaking taxpayers who need help preparing their own tax returns. Go to IRS.gov/VITA, download the free IRS2Go app, or call 800﻿-﻿906﻿-﻿9887 for information on free tax return preparation.

TCE. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors. Go to IRS.gov/TCE or download the free IRS2Go app for information on free tax return preparation.

MilTax. Members of the U.S. Armed Forces and qualified veterans may use MilTax, a free tax service offered by the Department of Defense through Military OneSource. For more information, go to MilitaryOneSource (MilitaryOneSource.mil/MilTax).Also, the IRS offers Free Fillable Forms, which can be completed online and then e-filed regardless of income.

Using online tools to help prepare your return.

Go to IRS.gov/Tools for the following.

The Earned Income Tax Credit Assistant (IRS.gov/EITCAssistant) determines if you’re eligible for the earned income credit (EIC).

The Online EIN Application (IRS.gov/EIN) helps you get an employer identification number (EIN) at no cost.

The Tax Withholding Estimator (IRS.gov/W4App) makes it easier for you to estimate the federal income tax you want your employer to withhold from your paycheck. This is tax withholding. See how your withholding affects your refund, take-home pay, or tax due.

The First-Time Homebuyer Credit Account Look-up (IRS.gov/HomeBuyer) tool provides information on your repayments and account balance.

The Sales Tax Deduction Calculator (IRS.gov/SalesTax) figures the amount you can claim if you itemize deductions on Schedule﻿ ﻿A (Form 1040).

Getting answers to your tax questions. On IRS.gov, you can get up-to-date information on current events and changes in tax law.

IRS.gov/Help: A variety of tools to help you get answers to some of the most common tax questions.

IRS.gov/ITA: The Interactive Tax Assistant, a tool that will ask you questions and, based on your input, provide answers on a number of tax topics.

IRS.gov/Forms: Find forms, instructions, and publications. You will find details on the most recent tax changes and interactive links to help you find answers to your questions.

You may also be able to access tax information in your e-filing software.

Need someone to prepare your tax return?

There are various types of tax return preparers, including enrolled agents, certified public accountants (CPAs), accountants, and many others who don’t have professional credentials. If you choose to have someone prepare your tax return, choose that preparer wisely. A paid tax preparer is:

Primarily responsible for the overall substantive accuracy of your return,

Required to sign the return, and

Required to include their preparer tax identification number (PTIN).

Although the tax preparer always signs the return, you're ultimately responsible for providing all the information required for the preparer to accurately prepare your return and for the accuracy of every item reported on the return. Anyone paid to prepare tax returns for others should have a thorough understanding of tax matters. For more information on how to choose a tax preparer, go to Tips for Choosing a Tax Preparer on IRS.gov.

Employers can register to use Business Services Online.

The Social Security Administration (SSA) offers online service at SSA.gov/employer for fast, free, and secure W-2 filing options to CPAs, accountants, enrolled agents, and individuals who process Form W-2, Wage and Tax Statement, and Form W-2c, Corrected Wage and Tax Statement.

IRS social media.

Go to IRS.gov/SocialMedia to see the various social media tools the IRS uses to share the latest information on tax changes, scam alerts, initiatives, products, and services. At the IRS, privacy and security are our highest priority. We use these tools to share public information with you. Don’t post your social security number (SSN) or other confidential information on social media sites. Always protect your identity when using any social networking site.

The following IRS YouTube channels provide short, informative videos on various tax-related topics in English, Spanish, and ASL.

Youtube.com/irsvideos.

Youtube.com/irsvideosmultilingua.

Youtube.com/irsvideosASL.

Watching IRS videos.

The IRS Video portal (IRSVideos.gov) contains video and audio presentations for individuals, small businesses, and tax professionals.

Online tax information in other languages.

You can find information on IRS.gov/MyLanguage if English isn’t your native language.

Free Over-the-Phone Interpreter (OPI) Service.

The IRS is committed to serving taxpayers with limited-English proficiency (LEP) by offering OPI services. The OPI Service is a federally funded program and is available at Taxpayer Assistance Centers (TACs), most IRS offices, and every VITA/TCE tax return site. The OPI Service is accessible in more than 350 languages.

Accessibility Helpline available for taxpayers with disabilities.

Taxpayers who need information about accessibility services can call 833﻿-﻿690﻿-﻿0598. The Accessibility Helpline can answer questions related to current and future accessibility products and services available in alternative media formats (for example, braille, large print, audio, etc.). The Accessibility Helpline does not have access to your IRS account. For help with tax law, refunds, or account-related issues, go to IRS.gov/LetUsHelp.

Note. Form 9000, Alternative Media Preference, or Form 9000(SP) allows you to elect to receive certain types of written correspondence in the following formats.

Standard Print.

Large Print.

Braille.

Audio (MP3).

Plain Text File (TXT).

Braille Ready File (BRF).

Disasters.

Go to IRS.gov/DisasterRelief to review the available disaster tax relief.

Getting tax forms and publications.

Go to IRS.gov/Forms to view, download, or print all the forms, instructions, and publications you may need. Or, you can go to IRS.gov/OrderForms to place an order.

Getting tax publications and instructions in eBook format.

Download and view most tax publications and instructions (including the Instructions for Form 1040) on mobile devices as eBooks at IRS.gov/eBooks.

IRS eBooks have been tested using Apple's iBooks for iPad. Our eBooks haven’t been tested on other dedicated eBook readers, and eBook functionality may not operate as intended.

Access your online account.

Go to IRS.gov/Account to securely access information about your federal tax account.

View the amount you owe and a breakdown by tax year.

See payment plan details or apply for a new payment plan.

Make a payment or view 5 years of payment history and any pending or scheduled payments.

Access your tax records, including key data from your most recent tax return, and transcripts.

View digital copies of select notices from the IRS.

Approve or reject authorization requests from tax professionals.

View your address on file or manage your communication preferences.

Get a transcript of your return.

With an online account, you can access a variety of information to help you during the filing season. You can get a transcript, review your most recently filed tax return, and get your adjusted gross income. Create or access your online account at IRS.gov/Account.

Tax Pro Account.

This tool lets your tax professional submit an authorization request to access your individual taxpayer IRS online account. For more information, go to IRS.gov/TaxProAccount.

Using direct deposit.

The safest and easiest way to receive a tax refund is to e-file and choose direct deposit, which securely and electronically transfers your refund directly into your financial account. Direct deposit also avoids the possibility that your check could be lost, stolen, destroyed, or returned undeliverable to the IRS. Eight in 10 taxpayers use direct deposit to receive their refunds. If you don’t have a bank account, go to IRS.gov/DirectDeposit for more information on where to find a bank or credit union that can open an account online.

Reporting and resolving your tax-related identity theft issues.

Tax-related identity theft happens when someone steals your personal information to commit tax fraud. Your taxes can be affected if your SSN is used to file a fraudulent return or to claim a refund or credit.

The IRS doesn’t initiate contact with taxpayers by email, text messages (including shortened links), telephone calls, or social media channels to request or verify personal or financial information. This includes requests for personal identification numbers (PINs), passwords, or similar information for credit cards, banks, or other financial accounts.

Go to IRS.gov/IdentityTheft, the IRS Identity Theft Central webpage, for information on identity theft and data security protection for taxpayers, tax professionals, and businesses. If your SSN has been lost or stolen or you suspect you’re a victim of tax-related identity theft, you can learn what steps you should take.

Get an Identity Protection PIN (IP PIN). IP PINs are six-digit numbers assigned to taxpayers to help prevent the misuse of their SSNs on fraudulent federal income tax returns. When you have an IP PIN, it prevents someone else from filing a tax return with your SSN. To learn more, go to IRS.gov/IPPIN.

Ways to check on the status of your refund.

Go to IRS.gov/Refunds.

Download the official IRS2Go app to your mobile device to check your refund status.

Call the automated refund hotline at 800﻿-﻿829﻿-﻿1954.

The IRS can’t issue refunds before mid-February for returns that claimed the EIC or the additional child tax credit (ACTC). This applies to the entire refund, not just the portion associated with these credits.

Making a tax payment.

Payments of U.S. tax must be remitted to the IRS in U.S. dollars. Digital assets are not accepted. Go to IRS.gov/Payments for information on how to make a payment using any of the following options.

IRS Direct Pay: Pay your individual tax bill or estimated tax payment directly from your checking or savings account at no cost to you.

Debit Card, Credit Card, or Digital Wallet: Choose an approved payment processor to pay online or by phone.

Electronic Funds Withdrawal: Schedule a payment when filing your federal taxes using tax return preparation software or through a tax professional.

Electronic Federal Tax Payment System: Best option for businesses. Enrollment is required.

Check or Money Order: Mail your payment to the address listed on the notice or instructions.

Cash: You may be able to pay your taxes with cash at a participating retail store.

Same-Day Wire: You may be able to do same-day wire from your financial institution. Contact your financial institution for availability, cost, and time frames.

Note. The IRS uses the latest encryption technology to ensure that the electronic payments you make online, by phone, or from a mobile device using the IRS2Go app are safe and secure. Paying electronically is quick, easy, and faster than mailing in a check or money order.

What if I can’t pay now?

Go to IRS.gov/Payments for more information about your options.

Apply for an online payment agreement (IRS.gov/OPA) to meet your tax obligation in monthly installments if you can’t pay your taxes in full today. Once you complete the online process, you will receive immediate notification of whether your agreement has been approved.

Use the Offer in Compromise Pre-Qualifier to see if you can settle your tax debt for less than the full amount you owe. For more information on the Offer in Compromise program, go to IRS.gov/OIC.

Filing an amended return.

Go to IRS.gov/Form1040X for information and updates.

Checking the status of your amended return.

Go to IRS.gov/WMAR to track the status of Form 1040-X amended returns.

It can take up to 3 weeks from the date you filed your amended return for it to show up in our system, and processing it can take up to 16 weeks.

Understanding an IRS notice or letter you’ve received.

Go to IRS.gov/Notices to find additional information about responding to an IRS notice or letter.

Responding to an IRS notice or letter.

You can now upload responses to all notices and letters using the Document Upload Tool. For notices that require additional action, taxpayers will be redirected appropriately on IRS.gov to take further action. To learn more about the tool go to IRS.gov/Upload.

Note. You can use Schedule﻿ ﻿LEP (Form 1040), Request for Change in Language Preference, to state a preference to receive notices, letters, or other written communications from the IRS in an alternative language. You may not immediately receive written communications in the requested language. The IRS’s commitment to LEP taxpayers is part of a multi-year timeline that began providing translations in 2023. You will continue to receive communications, including notices and letters, in English until they are translated to your preferred language.

Contacting your local TAC.

Keep in mind, many questions can be answered on IRS.gov without visiting a TAC. Go to IRS.gov/LetUsHelp for the topics people ask about most. If you still need help, TACs provide tax help when a tax issue can’t be handled online or by phone. All TACs now provide service by appointment, so you’ll know in advance that you can get the service you need without long wait times. Before you visit, go to IRS.gov/TACLocator to find the nearest TAC and to check hours, available services, and appointment options. Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on “Local Offices.”

The Taxpayer Advocate Service (TAS) Is Here To Help You

What Is TAS?

TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. TAS strives to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights.

How Can You Learn About Your Taxpayer Rights?

The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Go to TaxpayerAdvocate.IRS.gov to help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them.

What Can TAS Do for You?

TAS can help you resolve problems that you can’t resolve with the IRS. And their service is free. If you qualify for their assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:

Your problem is causing financial difficulty for you, your family, or your business;

You face (or your business is facing) an immediate threat of adverse action; or

You’ve tried repeatedly to contact the IRS but no one has responded, or the IRS hasn’t responded by the date promised.

How Can You Reach TAS?

TAS has offices in every state, the District of Columbia, and Puerto Rico. To find your advocate’s number:

Go to TaxpayerAdvocate.IRS.gov/Contact-Us;

Download Pub. 1546, The Taxpayer Advocate Service Is Your Voice at the IRS, available at IRS.gov/pub/irs-pdf/p1546.pdf;

Call the IRS toll free at 800-TAX-FORM (800﻿-﻿829﻿-﻿3676) to order a copy of Pub. 1546;

Check your local directory; or

Call TAS toll free at 877﻿-﻿777﻿-﻿4778.

How Else Does TAS Help Taxpayers?

TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, report it to TAS at IRS.gov/SAMS. Be sure to not include any personal taxpayer information.

Low Income Taxpayer Clinics (LITCs)

LITCs are independent from the IRS and TAS. LITCs represent individuals whose income is below a certain level and who need to resolve tax problems with the IRS. LITCs can represent taxpayers in audits, appeals, and tax collection disputes before the IRS and in court. In addition, LITCs can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee. For more information or to find an LITC near you, go to the LITC page at TaxpayerAdvocate.IRS.gov/LITC or see IRS Pub. 4134, Low Income Taxpayer Clinic List, at IRS.gov/pub/irs-pdf/4134.pdf.

Index

Numbers | A | B | C | D | E | F | G | I | L | M | P | Q | R | S | T

Numbers

1099-C Persons who each receive﻿…

A

Abandonments Abandonments

Canceled debt Canceled debt.

Assistance (See Tax help)

B

Bankruptcy Bankruptcy

Reduction of tax attributes Bankruptcy and Insolvency

Business:

Real property indebtedness Qualified Real Property﻿…

C

Canceled debt Persons who each receive﻿…

Exceptions:

Deductible debt Deductible Debt

Gifts Gifts, Bequests, Devises﻿…

Price reduced after purchase Price Reduced After﻿…

Student loans Student Loans

Exclusions:

Bankruptcy Bankruptcy

Insolvency Insolvency

Qualified farm indebtedness Qualified Farm Indebtedness

Qualified principal residence indebtedness Qualified Principal﻿…

Qualified real property business indebtedness Qualified Real Property﻿…

Income from Canceled Debts

Co-owners Persons who each receive﻿…

D

Debts:

Stockholder's Stockholder Debt

Definitions:

Adjusted tax attributes Adjusted tax attributes

Qualified acquisition indebtedness Definition of qualified﻿…

Qualified farm indebtedness Qualified Farm Indebtedness

Qualified principal residence indebtedness Qualified Principal﻿…

Qualified real property business indebtedness Qualified Real Property﻿…

E

Educational loans Student Loans

F

Farm indebtedness Qualified Farm Indebtedness

Reduction of tax attributes Qualified Farm Indebtedness

Foreclosures Foreclosures and Repossessions

Form:

1099-A Forms 1099-A and 1099-C

1099-C Forms 1099-A and 1099-C

G

Gifts Gifts, Bequests, Devises﻿…

I

Income from canceled debt Canceled Debts

Insolvency Insolvency

Reduction of tax attributes Bankruptcy and Insolvency

L

Limits:

Excluded farm debt Exclusion limit.

Qualified real property business indebtedness Exclusion limit.

Loans:

Student Student Loans

M

Missing children, photographs of Photographs of missing﻿…

Mortgage Debt Relief Act (See Qualified Principal Residence Indebtedness)

P

Principal residence indebtedness Qualified Principal﻿…

Publications (See Tax help)

Q

Qualified farm indebtedness Qualified Farm Indebtedness

Reduction of tax attributes Qualified Farm Indebtedness

Qualified principal residence indebtedness Qualified Principal﻿…

Examples Qualified Principal﻿…

Qualified real property business indebtedness Qualified Real Property﻿…

Reduction of tax attributes Qualified Real Property﻿…

R

Real property business indebtedness Qualified Real Property﻿…

Recapture:

Basis reductions Recapture of basis reductions

Repossessions Foreclosures and Repossessions

S

Stockholder debts Stockholder Debt

Student loans Student Loans

T

Tax attributes, reduction of:

Bankruptcy Bankruptcy and Insolvency

Insolvency Bankruptcy and Insolvency

Qualified Principal Residence Indebtedness Qualified Principal﻿…

Qualified farm indebtedness Qualified Farm Indebtedness

Qualified real property business indebtedness Qualified Real Property﻿…

Tax help How To Get Tax Help