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Publication 4681 Cat. No. 51508F Contents

Reminder ...... 2 Department of the Canceled Debts, Introduction ...... 2 Treasury Common Situations Covered In Internal Revenue Foreclosures, This Publication ...... 2 Service Chapter 1. Canceled Debts ...... 3 Repossessions, Form 1099-C ...... 3 Discounts and Loan Modifications ...... 4 and Sales or Other Dispositions (Such as Foreclosures and Abandonments Repossessions) ...... 4 Abandonments ...... 4 Stockholder Debt ...... 4

(for Individuals) Exceptions ...... 4 Gifts, Bequests, Devises, and Inheritances ...... 4 Student Loans ...... 4 For use in preparing Deductible Debt ...... 5 Price Reduced After Purchase ..... 5 2020 Returns Exclusions ...... 5 Bankruptcy ...... 5 Insolvency ...... 5 Insolvency Worksheet ...... 6 Qualified Farm Indebtedness ...... 7 Qualified Real Property Business Indebtedness ...... 8 Qualified Principal Residence Indebtedness ...... 9

Reduction of Tax Attributes ...... 10 Qualified Principal Residence Indebtedness ...... 10 Bankruptcy and Insolvency ...... 10 Qualified Farm Indebtedness ..... 11 Qualified Real Property Business Indebtedness ...... 11

Chapter 2. Foreclosures and Repossessions ...... 12 Worksheet for Foreclosures and Reposessions ...... 13

Chapter 3. Abandonments ...... 13

Chapter 4. How To Get Tax Help .... 14

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 Foreclosure moratorium and right to re- quest forbearance. If you have a primary Get forms and other information faster and easier at: and/or secondary federally insured or guaran- • IRS.gov (English) • IRS.gov/Korean (한국어) teed mortgage loan on your primary residence • IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский) and you suffered a financial hardship during the • IRS.gov/Chinese (中文) • IRS.gov/Vietnamese (TiếngViệt) coronavirus emergency, you are protected from foreclosure for a period of 180 days if you

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notified the servicer of that loan. Within the ini- may recognize taxable gain. Whether you also 551 551 Basis of Assets tial 180-day forbearance period, you may also recognize income from canceled debt depends request an additional 180 days of forbearance in part on whether you are personally liable for 908 908 Bankruptcy Tax Guide by notifying the servicer of the same circum- the debt and in part on whether the outstanding Form (and Instructions) stances and reason. loan balance is more than the fair market value

During the period of the forbearance, no (FMV) of the property. Figuring your gain or loss 982 982 Reduction of Tax Attributes Due to fees, penalties, or interest shall be assessed and income from canceled debt arising from a Discharge of Indebtedness (and beyond the amounts scheduled or calculated as foreclosure or repossession is discussed later Section 1082 Basis Adjustment) if you had made all contractual payments on under Foreclosures and Repossessions.

1099-C 1099-C Cancellation of Debt time and in full under the terms of the mortgage Generally, you abandon property when you voluntarily and permanently give up possession contract. 1099-DIV 1099-DIV Dividends and Distributions and use of property you own with the intention Discharge of qualified principal residence

of ending your ownership but without passing it 3800 3800 General Business Credit indebtedness before 2026. Qualified princi- on to anyone else. Figuring your gain or loss pal residence indebtedness can be excluded and income from canceled debt arising from an from income for discharges before January 1, abandonment is discussed later under Aban- 2026. Common Situations donments. Covered In This Comments and suggestions. We welcome your comments about this publication and sug- Publication Reminders gestions for future editions. Student loan indebtedness. If student loan You can send us comments through The sections of this publication that apply to indebtedness is discharged after 2017 on ac- IRS.gov/FormComments. Or, you can write to you depend on the type of debt canceled, the count of the student’s death or disability, the the Internal Revenue Service, Tax Forms and tax attributes you have, and whether or not you discharged debt may not have to be included in Publications, 1111 Constitution Ave. NW, continue to own the property that was subject to income. See Student loan cancellation, later, for IR-6526, Washington, DC 20224. the debt. Some examples of common circum- stances are provided in the following para- more information. Although we can’t respond individually to graphs to help guide you through this publica- each comment received, we do appreciate your Photographs of missing children. The Inter- tion. These examples don't cover every feedback and will consider your comments and nal Revenue Service is a proud partner with the situation but are intended to provide general suggestions as we revise our tax forms, instruc- National Center for Missing & Exploited guidance for the most common situations. Children® (NCMEC). Photographs of missing tions, and publications. Do not send tax ques- children selected by the Center may appear in tions, tax returns, or payments to the above ad- Nonbusiness credit card debt cancellation. this publication on pages that would otherwise dress. If you had a nonbusiness credit card debt can- be blank. You can help bring these children Getting answers to your tax questions. celed, you may be able to exclude the canceled home by looking at the photographs and calling If you have a tax question not answered by this debt from income if the cancellation occurred in 800-THE-LOST (800-843-5678) if you recog- publication or the How To Get Tax Help section a title 11 bankruptcy case or you were insolvent nize a child. at the end of this publication, go to the IRS In- immediately before the cancellation. You teractive Tax Assistant page at IRS.gov/ should read Bankruptcy or Insolvency under Introduction Help/ITA where you can find topics by using the Exclusions in chapter 1 to see if you can ex- search feature or viewing the categories listed. clude the canceled debt from income under one This publication explains the federal tax treat- of those provisions. If you can exclude part or ment of canceled debts, foreclosures, repos- Getting tax forms, instructions, and pub- all of the canceled debt from income, you also sessions, and abandonments. lications. Visit IRS.gov/Forms to download should read Bankruptcy and Insolvency under Generally, if you owe a debt to someone current and prior-year forms, instructions, and Reduction of Tax Attributes in chapter 1. else and they cancel or forgive that debt for less publications. than its full amount, you are treated for income Personal vehicle repossession. If you had a Ordering tax forms, instructions, and tax purposes as having income and may have personal vehicle repossessed and disposed of publications. Go to IRS.gov/OrderForms to to pay tax on this income. by the lender during the year, you will need to order current forms, instructions, and publica- determine your gain or nondeductible loss on tions; call 800-829-3676 to order prior-year Note. This publication generally refers to the disposition. This is explained in chapter 2. If forms and instructions. The IRS will process debt that is canceled, forgiven, or discharged the lender also canceled all or part of the re- your order for forms and publications as soon for less than the full amount of the debt as “can- maining amount of the loan, you may be able to as possible. Do not resubmit requests you’ve celed debt.” exclude the canceled debt from income if the already sent us. You can get forms and publica- cancellation occurred in a title 11 bankruptcy tions faster online. Sometimes a debt, or part of a debt, that you case or you were insolvent immediately before don't have to pay isn't considered canceled the cancellation. You should read Bankruptcy or debt. These exceptions are discussed later un- Useful Items Insolvency under Exclusions in chapter 1 to see der Exceptions. You may want to see: if you can exclude the canceled debt from in- Sometimes a canceled debt may be exclu- come under one of those provisions. If you can ded from your income. But if you do exclude Publication exclude part or all of the canceled debt from in- canceled debt from income, you may be re- come, you should also read Bankruptcy and In- quired to reduce your “tax attributes.” These ex- 225 225 Farmer's Tax Guide solvency under Reduction of Tax Attributes in clusions and the reduction of tax attributes as- 334 334 Tax Guide for Small Business (For chapter 1. sociated with them are discussed later under Individuals Who Use Schedule C) Exclusions. Main home foreclosure or abandonment. If

Foreclosure and repossession are remedies 523 523 Selling Your Home a lender foreclosed on your main home during that your lender may exercise if you fail to make the year, you will need to determine your gain or 525 525 Taxable and Nontaxable Income payments on your loan and you have previously loss on the foreclosure. Foreclosures are ex- granted that lender a mortgage or other security 536 536 Net Operating Losses (NOLs) for plained in chapter 2 and abandonments are ex- interest in some of your property. These rem- Individuals, Estates, and Trusts plained in chapter 3. edies allow the lender to seize or sell the prop-

542 542 Corporations erty securing the loan. When your property is Main home loan modification (workout

foreclosed upon or repossessed and sold, you 544 544 Sales and Other Dispositions of agreement). If a lender agreed to a mortgage are treated as having sold the property and you Assets loan modification (a “workout”) in 2019 that

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included a reduction in the principal balance of gain or loss, see chapter 2 of this publication or explained next. Also, see the chart after the ex- the loan in 2020, you should read Qualified see Pub. 544, Sales and Other Dispositions of planation for a quick reference guide for the co- Principal Residence Indebtedness under Exclu- Assets. des used in box 6. sions in chapter 1 to see if you can exclude part There are several exceptions and exclu- or all of the canceled debt from income. If you Code A — Bankruptcy. Code A is used to sions that may result in part or all of a canceled can exclude part or all of the canceled debt identify cancellation of debt as a result of a title debt being nontaxable. See Exceptions and Ex- from income, you should also read Qualified 11 bankruptcy case. See Bankruptcy, later. clusions, later. You must report any taxable Principal Residence Indebtedness under Re- canceled debt as ordinary income on: duction of Tax Attributes in chapter 1. Code B — Other judicial debt relief. • Schedule 1 (Form 1040), line 8, if the debt Code B is used to identify cancellation of debt is a nonbusiness debt; as a result of a receivership, foreclosure, or • Schedule C (Form 1040), line 6, if the debt similar federal or state court proceeding other is related to a nonfarm sole proprietorship; than bankruptcy. • Schedule E (Form 1040), line 3, if the debt is related to nonfarm rental of real property; Code C — Statute of limitations or expi- • Form 4835, line 6, if the debt is related to a ration of deficiency period. Code C is used to 1. farm rental activity for which you use Form identify cancellation of debt either when the 4835 to report farm rental income based statute of limitations for collecting the debt ex- on crops or livestock produced by a tenant; pires or when the statutory period for filing a or claim or beginning a deficiency judgment pro- Canceled Debts • Schedule F (Form 1040), line 8, if the debt ceeding expires. In the case of the expiration of is farm debt and you are a farmer. a statute of limitations, an identifiable event oc- This chapter discusses the tax treatment of curs only if and when your affirmative defense canceled debts. of the statute of limitations is upheld in a final Form 1099-C judgment or decision in a judicial proceeding, and the period for appealing the judgment or If you receive a Form 1099-C, that means an General Rules decision has expired. applicable entity has reported an identifiable event to the IRS regarding a debt you owe. For Generally, if a debt for which you are personally Code D — Foreclosure election. Code D information on the reasons an applicable entity liable is forgiven or discharged for less than the is used to identify cancellation of debt when the files Form 1099-C, see Identifiable event codes, full amount owed, the debt is considered can- creditor elects foreclosure remedies that statu- later. Unless you meet one of the exceptions or celed in whatever amount it remained unpaid. torily end or bar the creditor's right to pursue exclusions discussed later, this canceled debt There are exceptions to this rule, discussed un- collection of the debt. This event applies to a is ordinary income and must be reported on the der Exceptions, later. Generally, you must in- mortgage lender or holder who is barred from appropriate form discussed above. clude the canceled debt in your income. How- pursuing debt collection after a power of sale in ever, you may be able to exclude the canceled the mortgage or deed of trust is exercised. An applicable entity includes: debt. See Exclusions, later. Code E — Debt relief from probate or 1. A financial institution. similar proceeding. Code E is used to identify Example. John owed $1,000 to Mary. Mary 2. A credit union. cancellation of debt as a result of a probate agreed to accept and John paid $400 in satis- court or similar legal proceeding. faction of the entire debt. John has canceled 3. Any of the following, its successor, or sub- debt of $600. unit of one of the following: Code F — By agreement. Code F is used to identify cancellation of debt as a result of an a. The Federal Deposit Insurance Cor- Example. Margaret owed $1,000 to Henry. agreement between the creditor and the debtor poration (FDIC), Henry and Margaret agreed that Margaret to cancel the debt at less than full considera- would provide Henry with services (instead of b. The Resolution Trust Corporation tion. money) in full satisfaction of the debt. Margaret (RTC), doesn't have canceled debt. Instead, she has Code G — Decision or policy to discon- c. The National Credit Union Administra- income from services. tinue collection. Code G is used to identify tion (NCUA), or cancellation of debt as a result of a decision or A debt includes any indebtedness: d. Any other federal executive agency, a defined policy of the creditor to discontinue • For which you are liable, or including government corporations, collection activity and cancel the debt. For pur- • Subject to which you hold property. any military department, the U.S. poses of this identifiable event, a defined policy includes both a written policy and the creditor's Debt for which you are personally liable is re- Postal Service, or the Postal Rate established business practice. course debt. All other debt is nonrecourse debt. Commission. Code H — Other actual discharge before If you aren't personally liable for the debt, 4. A corporate subsidiary of a financial insti- identifiable event. Code H is used to identify you don't have ordinary income from the can- tution or credit union (if the affiliation sub- an actual cancellation of debt that occurs before cellation of debt unless you retain the collateral jects the subsidiary to federal or state reg- any of the identifiable events described in co- and either: ulation). des A through G. • The lender offers a discount for the early 5. A federal government agency, including a payment of the debt, or department, an agency, a court or court • The lender agrees to a loan modification administrative office, or a judicial or legis- Form 1099-C Reference Guide for that results in the reduction of the principal lative instrumentality. Box 6 Identifiable Event Codes balance of the debt. 6. Any organization of which lending money A Bankruptcy See Discounts and Loan Modifications, later. is a significant trade or business. B Other judicial debt relief However, upon the disposition of the prop- For more information on the applicable entities C Statute of limitations or expiration of deficiency erty securing a nonrecourse debt, the amount that must file a Form 1099-C, see the 2020 In- period realized includes the entire unpaid amount of structions for Forms 1099-A and 1099-C, avail- D Foreclosure election the debt, not just the FMV of the property. As a able at IRS.gov/pub/irs-prior/i1099ac--2020.pdf. E Debt relief from probate or similar proceeding result, you may realize a gain or loss if the out- F By agreement standing debt immediately before the disposi- Identifiable event codes. Box 6 of Form G Decision or policy to discontinue collection tion is more or less than your adjusted basis in 1099-C should indicate the reason the creditor H Other actual discharge before identifiable event the property. For more details on figuring your filed this form. The codes shown in box 6 are

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Even if you didn't receive a Form repossession of the property is treated as a sale ! 1099-C, you must report canceled debt or disposition of the property by you and may CAUTION as gross income on your tax return un- result in your realization of gain or loss. The Exceptions less one of the exceptions or exclusions descri- gain or loss on the disposition of the property is bed later applies. measured by the difference between the FMV There are several exceptions to the require- of the property at the time of the disposition and ment that you include canceled debt in income. These exceptions apply before the exclusions Amount of canceled debt. The amount in your adjusted basis (usually your cost) in the discussed later and don't require you to reduce box 2 of Form 1099-C may represent some or property. The character of the gain or loss (such your tax attributes. all of the debt that has been canceled. The as ordinary or capital) is determined by the amount in box 2 will include principal and may character of the property. If the lender forgives include interest and other nonprincipal amounts all or part of the amount of the debt in excess of Gifts, Bequests, Devises, (such as fees or penalties). Unless you meet the FMV of the property, the cancellation of the and Inheritances one of the exceptions or exclusions discussed excess debt may result in ordinary income. The later, the amount of the debt that has been can- ordinary income from the cancellation of debt (the excess of the canceled debt over the FMV In most cases, you don't have income from can- celed is ordinary income and must be reported celed debt if the debt is canceled as a gift, be- on the appropriate form, as discussed earlier. of the property) must be included in your gross income reported on your tax return unless one quest, devise, or inheritance. Interest included in canceled debt. If any in- of the exceptions or exclusions described later terest is included in the amount of canceled applies. For more details, see Exceptions and Student Loans debt in box 2, it will be shown in box 3. Whether Exclusions, later. the interest portion of the canceled debt must Generally, if you are responsible for making be included in your income depends on Nonrecourse debt. If you owned property that loan payments, and the loan is canceled or re- whether the interest would be deductible if you was subject to a nonrecourse debt in excess of paid by someone else, you must include the paid it. See Deductible Debt under Exceptions, the FMV of the property, the lender's foreclo- amount that was canceled or paid on your be- later. sure on the property doesn't result in ordinary half in your gross income for tax purposes. income from the cancellation of debt. The entire However, in certain circumstances, you may be Persons who each receive a Form 1099-C amount of the nonrecourse debt is treated as an able to exclude amounts from gross income as showing the full amount of debt. If you and amount realized on the disposition of the prop- a result of: another person were jointly and severally liable erty. The gain or loss on the disposition of the • Student loan cancellation due to meeting for a canceled debt, each of you may get a property is measured by the difference between certain work requirements, the total amount realized (the entire amount of Form 1099-C showing the entire amount of the Student loan cancellation due to death or the nonrecourse debt plus the amount of cash • canceled debt. However, you may not have to permanent and total disability, or report that entire amount as income. The and the FMV of any property received) and your amount, if any, you must report depends on all adjusted basis in the property. The character of • Student loan repayment assistance. the facts and circumstances, including: the gain or loss is determined by the character • State law, of the property. Student loan cancellation. If your student • The amount of debt proceeds each person loan is canceled in part or in whole in 2020, you received, More information. See chapter 2 of this publi- may not have to include the canceled debt in • How much of any interest deduction from cation and Pubs. 523, 544, and 551 for more your income. To exclude canceled student loan the debt was claimed by each person, details. debt from your income, your loan must have • How much of the basis of any co-owned been made by a qualified lender to assist you in property bought with the debt proceeds Abandonments attending an eligible educational institution. In was allocated to each co-owner, and addition, the cancellation must be due to death or permanent and total disability or pursuant to • Whether the canceled debt qualifies for Recourse debt. If you abandon property that a provision in the loan that all or part of the debt any of the exceptions or exclusions descri- secures a debt for which you are personally lia- will be canceled if you work: bed in this publication. ble (recourse debt) and the debt is canceled, • For a certain period of time, See Example 3 under Insolvency, later. you will realize ordinary income equal to the canceled debt. You must report this income on • In certain professions, and your tax return unless one of the exceptions or • For any of a broad class of employers. Discounts and Loan exclusions described later applies. For more Modifications details, see Exceptions and Exclusions, later. The cancellation of your loan won’t This income is separate from any amount real- qualify for tax-free treatment if it is can- If a lender discounts (reduces) the principal bal- ized from the abandonment of the property. For celed because of services you per- ance of a loan because you pay it off early, or more details, see chapter 3. formed for the educational institution that made agrees to a loan modification (a “workout”) that the loan or other organization that provided the includes a reduction in the principal balance of Nonrecourse debt. If you abandon property funds. See Exception, later. a loan, the amount of the discount or the that secures a debt for which you aren't person- amount of principal reduction is canceled debt. ally liable (nonrecourse debt), you may realize Eligible educational institution. This is However, if the debt is nonrecourse and you gain or loss but won't have cancellation of in- an educational institution that maintains a regu- didn't retain the collateral, you don't have can- debtedness income. lar faculty and curriculum and normally has a cellation of debt income. The amount of the regularly enrolled body of students in attend- canceled debt must be included in income un- Stockholder Debt ance at the place where it carries on its educa- less one of the exceptions or exclusions descri- tional activities. bed later applies. For more details, see Excep- If you are a stockholder in a corporation and the Qualified lenders. These include the fol- tions and Exclusions, later. corporation cancels or forgives your debt to it, lowing. the canceled debt is a constructive distribution. For more information, see Pub. 542, Corpora- 1. The United States, or an instrumentality or Sales or Other Dispositions agency thereof. (Such as Foreclosures and tions. 2. A state, territory, or possession of the Uni- Repossessions) ted States; or the District of Columbia; or any political subdivision thereof. Recourse debt. If you owned property that was subject to a recourse debt in excess of the 3. A public benefit corporation that is tax ex- FMV of the property, the lender's foreclosure or empt under section 501(c)(3); and that

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has assumed control of a state, county, or • A state education loan repayment program Bankruptcy municipal hospital; and whose employees eligible for funds under the Public Health are considered public employees under Service Act. Debt canceled in a title 11 bankruptcy case isn't state law. • Any other state loan repayment or loan for- included in your income. A title 11 bankruptcy giveness program that is intended to pro- 4. An eligible educational institution, if the case is a case under title 11 of the United vide for the increased availability of health loan is made: States Code (including all chapters in title 11 services in underserved or health profes- such as chapters 7, 11, and 13). You must be a a. As part of an agreement with an entity sional shortage areas (as determined by debtor under the jurisdiction of the court and the described in (1), (2), or (3) under such state). cancellation of the debt must be granted by the which the funds to make the loan You can’t deduct the interest you paid court or occur as a result of a plan approved by were provided to the educational insti- on a student loan to the extent pay- the court. tution; or ! CAUTION ments were made through your partici- You don’t qualify for the bankruptcy exclu- b. Under a program of the educational pation in the above programs. sion by being an owner of, or a partner in a part- institution that is designed to encour- nership that owns, a grantor trust or disregar- age its students to serve in occupa- ded entity that is a debtor in a title 11 tions with unmet needs or in areas Deductible Debt bankruptcy case. You must be a debtor in a title with unmet needs where the services 11 bankruptcy case to qualify for this exclusion. provided by the students (or former If you use the cash method of accounting, you students) are for or under the direc- don't realize income from the cancellation of How to report the bankruptcy exclusion. To tion of a governmental unit or a debt if the payment of the debt would have show that your debt was canceled in a bank- tax-exempt section 501(c)(3) organi- been a deductible expense. This exception ap- ruptcy case and is excluded from income, at- zation. plies before the price reduction exception dis- tach Form 982 to your federal income tax return cussed next. 5. In addition to (1)–(4) above, for loans can- and check the box on line 1a. Lines 1b through celed on account of the death or total and 1e don't apply to a cancellation that occurs in a Example. In December 2019, you get ac- title 11 bankruptcy case. Enter the total amount permanent disability of the student only, counting services for your farm on credit. In the lender of a private education loan (as of debt canceled in your title 11 bankruptcy early 2020, you have trouble paying your farm case on line 2. You must also reduce your tax defined in section 140(7) of the Consumer debts and your accountant forgives part of the Credit Protection Act). attributes in Part II of Form 982 as explained un- amount you owe for the accounting services. der Reduction of Tax Attributes, later. Section 501(c)(3) organization. This is How you treat the canceled debt depends on any corporation, community chest, fund, or your method of accounting. foundation organized and operated exclusively • Cash method. You don't include the can- Insolvency for one or more of the following purposes. celed debt in income because payment of • Charitable. the debt would have been deductible as a Don't include a canceled debt in income to the • Religious. business expense in 2020. extent that you were insolvent immediately be- • Educational. • Accrual method. Unless another exception fore the cancellation. You don’t qualify for the • Scientific. or exclusion applies, you must include the insolvency exclusion by being an owner of, or a • Literary. canceled debt in ordinary income because partner in a partnership that owns, a grantor • Testing for public safety. the expense was deductible in 2019 when trust or disregarded entity that is insolvent. You • Fostering national or international amateur you incurred the debt. must be insolvent to qualify for this exclusion. sports competition (but only if none of its You were insolvent immediately before the can- activities involve providing athletic facilities Price Reduced After cellation to the extent that the total of all of your or equipment). Purchase liabilities was more than the FMV of all of your • The prevention of cruelty to children or ani- assets immediately before the cancellation. For mals. purposes of determining insolvency, assets in- If debt you owe the seller for the purchase of clude the value of everything you own (includ- Exception. In most cases, the cancellation property is reduced by the seller at a time when ing assets that serve as collateral for debt and of a student loan made by an educational insti- you aren't insolvent and the reduction doesn't exempt assets, which are beyond the reach of tution because of services you performed for occur in a title 11 bankruptcy case, the reduc- your creditors under the law, such as your inter- that institution or another organization that pro- tion doesn't result in cancellation of debt in- est in a pension plan and the value of your re- vided the funds for the loan must be included in come. However, you must reduce your basis in tirement account). Liabilities include: gross income on your tax return. the property by the amount of the reduction of • The entire amount of recourse debt, your debt to the seller. The rules that apply to Refinanced loan. If you refinanced a stu- • The amount of nonrecourse debt that isn't bankruptcy and insolvency are explained in Ex- in excess of the FMV of the property that is dent loan with another loan from an eligible ed- clusions next. ucational institution or a tax-exempt organiza- security for the debt, and tion, that loan may also be considered as made • The amount of nonrecourse debt in excess by a qualified lender. The refinanced loan is Exclusions of the FMV of the property subject to the considered made by a qualified lender if it’s nonrecourse debt, to the extent nonre- made under a program of the refinancing organ- course debt in excess of the FMV of the After you have applied any exceptions to the ization that is designed to encourage students property subject to the debt is forgiven. general rule that a canceled debt is included in to serve in occupations with unmet needs or in your income, there are several reasons why you You can use the Insolvency Work- areas with unmet needs where the services re- might still be able to exclude a canceled debt TIP sheet, to help calculate the extent that quired of the students are for or under the direc- from your income. These exclusions are ex- you were insolvent immediately before tion of a governmental unit or a tax-exempt sec- plained next. If a canceled debt is excluded the cancellation. tion 501(c)(3) organization. from your income, it is nontaxable. In most ca- ses, however, if you exclude canceled debt Other exclusions must be applied before Student Loan Repayment Assistance. Stu- from income under one of these provisions, you the insolvency exclusion. This exclusion dent loan repayments made to you are tax free must also reduce your tax attributes (certain doesn't apply to a cancellation of debt that oc- if you received them for any of the following. credits, losses, and basis of assets) as ex- curs in a title 11 bankruptcy case. It also doesn't • The National Health Service Corps plained later under Reduction of Tax Attributes. apply if the debt is qualified principal residence (NHSC) Loan Repayment Program. indebtedness (defined in this section under Qualified Principal Residence Indebtedness, later) unless you elect to apply the insolvency

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Insolvency Worksheet Keep for Your Records 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) Amount Owed Liabilities (debts) 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 child care 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) FMV Immediately Before Assets 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. $

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exclusion instead of the qualified principal resi- severally liable. None of the exceptions to the For the definition of the term “related person,” dence indebtedness exclusion. general rule that canceled debt is included in in- see Related persons under At-Risk Amounts in come apply. They incurred the debt (originally Pub. 925, Passive Activity and At-Risk Rules. How to report the insolvency exclusion. To $12,000) to finance James's purchase of a show that you are excluding canceled debt from $9,000 motorcycle and Robin's purchase of a Other exclusions must be applied before income under the insolvency exclusion, attach laptop computer and software for personal use the qualified farm indebtedness exclusion. Form 982 to your federal income tax return and for $3,000. They each received a 2020 Form This exclusion doesn't apply to a cancellation of check the box on line 1b. On line 2, include the 1099-C from the bank showing the entire can- debt in a title 11 bankruptcy case or to the ex- smaller of the amount of the debt canceled or celed debt of $10,000 in box 2. Based on the tent you were insolvent immediately before the the amount by which you were insolvent imme- use of the loan proceeds, they agreed that cancellation. If qualified farm debt is canceled in diately before the cancellation. You can use the James was responsible for 75% of the debt and a title 11 case, you must apply the bankruptcy Insolvency Worksheet to help calculate the ex- Robin was responsible for the remaining 25%. exclusion rather than the exclusion for canceled tent that you were insolvent immediately before Therefore, James's share of the debt is $7,500 qualified farm debt. If you were insolvent imme- the cancellation. You must also reduce your tax (75% of $10,000), and Robin's share is $2,500 diately before the cancellation of qualified farm attributes in Part II of Form 982 as explained un- (25% of $10,000). By completing the Insolvency debt, you must apply the insolvency exclusion der Reduction of Tax Attributes, later. Worksheet, James determines that, immedi- before applying the exclusion for canceled ately before the cancellation of the debt, he was qualified farm debt. Example 1—amount of insolvency more insolvent to the extent of $5,000 ($15,000 total than canceled debt. In 2020, Greg was re- liabilities minus $10,000 FMV of his total as- Exclusion limit. The amount of canceled leased from his obligation to pay his personal sets). He can exclude $5,000 of his $7,500 can- qualified farm debt you can exclude from in- credit card debt in the amount of $5,000. Greg celed debt. Robin completes a separate insol- come under this exclusion is limited. It can't be received a 2020 Form 1099-C from his credit vency worksheet and determines she was more than the sum of: card lender showing the entire amount of dis- insolvent to the extent of $4,000 ($9,000 total li- 1. Your adjusted tax attributes, and charged debt of $5,000 in box 2. None of the abilities minus $5,000 FMV of her total assets). exceptions to the general rule that canceled She can exclude her entire canceled debt of 2. The total adjusted basis of qualified prop- debt is included in income apply. Greg uses the $2,500. erty you held at the beginning of 2021. Insolvency Worksheet to determine that his to- When completing his separate tax return, If you excluded canceled debt under the insol- tal liabilities immediately before the cancellation James checks the box on line 1b of Form 982 vency exclusion, the adjusted basis of any were $15,000 and the FMV of his total assets and enters $5,000 on line 2. He completes Part qualified property and adjusted tax attributes immediately before the cancellation was II to reduce his tax attributes as explained under are determined after any reduction of tax attrib- $7,000. This means that immediately before the Reduction of Tax Attributes, later. He must in- utes required under the insolvency exclusion. cancellation, Greg was insolvent to the extent of clude the remaining $2,500 (his $7,500 share of $8,000 ($15,000 total liabilities minus $7,000 the canceled debt minus the $5,000 extent to Any canceled qualified farm debt that is FMV of his total assets). Because the amount which he was insolvent) of canceled debt on more than this limit must be included in your in- by which Greg was insolvent immediately be- Schedule 1 (Form 1040), line 8 (unless another come. fore the cancellation was more than the amount exclusion applies). For more information about the basis of of his debt canceled, Greg can exclude the en- When completing her return, Robin checks property, see Pub. 551, Basis of Assets. tire $5,000 canceled debt from income. the box on line 1b of Form 982 and enters Adjusted tax attributes. Adjusted tax at- When completing his tax return, Greg $2,500 on line 2. She completes Part II to re- tributes means the sum of the following items. checks the box on line 1b of Form 982 and en- duce her tax attributes as explained under Re- ters $5,000 on line 2. Greg completes Part II to duction of Tax Attributes, later. She doesn't in- 1. Any net operating loss (NOL) for 2020 and reduce his tax attributes as explained under Re- clude any of the canceled debt on Schedule 1 any NOL carryover to 2020. duction of Tax Attributes, later. Greg doesn't in- (Form 1040), line 8. None of the canceled debt 2. Any net capital loss for 2020 and any capi- clude any of the $5,000 canceled debt on has to be included in her income. tal loss carryover to 2020. Schedule 1 (Form 1040), line 8. None of the canceled debt is included in his income. 3. Any passive activity loss carryover from Qualified Farm Indebtedness 2020. Example 2—amount of insolvency less 4. Three times the sum of any: than canceled debt. The facts are the same You can exclude canceled farm debt from in- as in Example 1 except that Greg's total liabili- come on your 2020 return if all of the following a. General business credit carryover to ties immediately before the cancellation were apply. or from 2020, $10,000 and the FMV of his total assets imme- • The debt was incurred directly in connec- b. Minimum tax credit available as of the diately before the cancellation was $7,000. In tion with your operation of the trade or beginning of 2021, this case, Greg is insolvent to the extent of business of farming. $3,000 ($10,000 total liabilities minus $7,000 • Fifty percent or more of your total gross re- c. Foreign tax credit carryover to or from FMV of his total assets) immediately before the ceipts for 2017, 2018, and 2019 were from 2020, and cancellation. Because the amount of the can- the trade or business of farming. d. Passive activity credit carryover from celed debt was more than the amount by which • The cancellation was made by a qualified 2020. Greg was insolvent immediately before the can- person. A qualified person is an individual, cellation, Greg can exclude only $3,000 of the organization, partnership, association, cor- Qualified property. This is any property $5,000 canceled debt from income under the poration, or other person who is actively you use or hold for use in your trade or business insolvency exclusion. and regularly engaged in the business of or for the production of income. Greg checks the box on line 1b of Form 982 lending money. A qualified person also in- and includes $3,000 on line 2. Also, Greg com- cludes any federal, state, or local govern- How to report the qualified farm indebted- pletes Part II to reduce his tax attributes as ex- ment or agency or instrumentality of one of ness exclusion. To show that all or part of plained under Reduction of Tax Attributes, later. those governments. For example, the U.S. your canceled debt is excluded from income Additionally, Greg must include $2,000 of can- Department of Agriculture is a qualified because it is qualified farm debt, check the box celed debt on Schedule 1 (Form 1040), line 8 person. A qualified person can't be related on line 1c of Form 982 and attach it to your (unless another exclusion applies). to you, can't be the person from whom you Form 1040 or 1040-SR. On line 2 of Form 982, acquired the property (or a person related include the amount of the qualified farm debt Example 3—joint debt and separate re- to this person), and can't be a person who canceled, but not more than the exclusion limit turns. In 2020, James and his wife Robin were receives a fee due to your investment in (explained earlier). You must also reduce your released from their obligation to pay a debt of the property (or a person related to this tax attributes in Part II of Form 982 as explained $10,000 for which they were jointly and person). under Reduction of Tax Attributes, later.

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Example 1—only qualified farm indebt- Example 3—no qualified farm indebted- Other exclusions must be applied before edness exclusion applies. In 2020, Chuck ness exclusion when insolvent to the extent the qualified real property business indebt- was released from his obligation to pay a of canceled debt. The facts are the same as edness exclusion. This exclusion doesn't ap- $10,000 debt that was incurred directly in con- in Example 2 except that immediately before ply to a cancellation of debt in a title 11 bank- nection with his trade or business of farming. the cancellation Bob was insolvent to the extent ruptcy case or to the extent you were insolvent Chuck received a Form 1099-C from the quali- of the full $10,000 canceled debt. Because the immediately before the cancellation. If qualified fied lender showing discharged debt of $10,000 exclusion for qualified farm debt doesn't apply real property business debt is canceled in a title in box 2. For his 2017, 2018, and 2019 tax to the extent that Bob’s insolvency (immediately 11 bankruptcy case, you must apply the bank- years, at least 50% of Chuck's total gross re- before the cancellation) was equal to the full ruptcy exclusion rather than the exclusion for ceipts were from the trade or business of farm- amount of the canceled debt, he checks only canceled qualified real property business debt. ing. Chuck's adjusted tax attributes are $5,000 the box on line 1b of Form 982 and enters If you were insolvent immediately before the and Chuck has $3,000 total adjusted basis in $10,000 on line 2. Bob completes Part II to re- cancellation of qualified real property business qualified property at the beginning of 2021. duce his tax attributes based on the insolvency debt, you must apply the insolvency exclusion Chuck had no other debt canceled during 2020 exclusion as explained under Reduction of Tax before applying the exclusion for canceled and no other exception or exclusion relating to Attributes, later. Bob doesn't include any of the qualified real property business debt. canceled debt income applies. canceled debt in income. Chuck can exclude $8,000 ($5,000 of adjus- Exclusion limit. The amount of canceled ted tax attributes plus $3,000 total adjusted ba- qualified real property business debt you can sis in qualified property at the beginning of Qualified Real Property exclude from income under this exclusion has 2021) of the $10,000 canceled debt from in- Business Indebtedness two limits. The amount you can exclude can't be come. Chuck checks the box on line 1c of Form more than either: 982 and enters $8,000 on line 2. Also, Chuck You can elect to exclude canceled qualified real 1. The excess (if any) of the outstanding prin- completes Part II to reduce his tax attributes as property business indebtedness from income. cipal amount of the qualified real property explained under Reduction of Tax Attributes, Qualified real property business indebtedness business debt (immediately before the later. The remaining $2,000 of canceled quali- is debt (other than qualified farm debt) that cancellation) over the FMV (immediately fied farm debt is included in Chuck's income on meets all of the following conditions. before the cancellation) of the business Schedule F, line 8. 1. It was incurred or assumed in connection real property securing the debt, or Example 2—both insolvency and quali- with real property used in a trade or busi- 2. The total adjusted basis of depreciable fied farm indebtedness exclusions apply. ness. Real property used in a trade or real property you held immediately before On March 2, 2020, Bob was released from his business doesn’t include real property de- the cancellation of the qualified real prop- obligation to pay a $10,000 business credit card veloped and held primarily for sale to cus- erty business debt (other than depreciable debt that was used directly in connection with tomers in the ordinary course of business. real property acquired in contemplation of his farming business. For his 2017, 2018, and 2. It is secured by that real property. As long the cancellation). 2019 tax years, at least 50% of Bob's total as certain other requirements are met, in- gross receipts were from the trade or business debtedness that is secured by 100% of the Note. When figuring the first limit in (1) of farming. Bob received a 2020 Form 1099-C ownership interest in a disregarded entity above, reduce the FMV of the business real from the qualified lender showing discharged holding real property will be treated as in- property securing the debt (immediately before debt of $10,000 in box 2. The FMV of Bob's to- debtedness that is secured by real prop- the cancellation) by the outstanding principal tal assets on March 2, 2020 (immediately be- erty. For more information, and for the re- amount of any other qualified real property busi- fore the cancellation of the credit card debt), quirements that must be met, see ness debt secured by that property (immedi- was $7,000 and Bob's total liabilities at that time Revenue Procedure 2014-20 available at ately before the cancellation). When figuring the were $11,000. Bob's adjusted tax attributes (a IRS.gov/irb/2014-9_IRB#RP-2014-20. second, (overall) limit in (2) above, use the ad- 2020 NOL) are $7,000 and Bob has $4,000 to- justed basis of the depreciable real property af- tal adjusted basis in qualified property at the be- 3. It was incurred or assumed: ter any reductions in basis required because of ginning of 2021. a. Before 1993, or the exclusion of debt canceled under the bank- Bob qualifies to exclude $4,000 of the can- ruptcy, insolvency, or farm debt provisions de- celed debt under the insolvency exclusion be- b. After 1992, if the debt is either (i) scribed in this publication or because of other cause he is insolvent to the extent of $4,000 im- qualified acquisition indebtedness basis adjustments that may apply to that depre- mediately before the cancellation ($11,000 total (defined next), or (ii) debt incurred to ciable property. refinance qualified real property busi- liabilities minus $7,000 FMV of total assets). For more information about the basis of ness debt incurred or assumed before Bob must reduce his tax attributes under the in- property, see Pub. 551. solvency rules before applying the rules for 1993 (but only to the extent the qualified farm debt. amount of such debt doesn't exceed How to elect the qualified real property Bob also qualifies to exclude the remaining the amount of debt being refinanced). business debt exclusion. You must make an $6,000 of canceled qualified farm debt. The 4. It is debt to which you elect to apply these election to exclude canceled qualified real prop- limit on Bob's exclusion from income of can- rules. erty business debt from gross income. The celed qualified farm debt is $7,000, the sum of: election must be made on a timely filed federal Residential rental property generally income tax return (including extensions) for 1. His adjusted tax attributes of $3,000 (the TIP qualifies as real property used in a 2020 and can be revoked only with IRS con- $7,000 NOL minus the $4,000 reduction of trade or business unless you also use sent. The election is made by completing Form tax attributes required because of the the dwelling as a home. For more information, 982 in accordance with its instructions. Attach $4,000 exclusion of canceled debt under see Dwelling Unit Used as a Home in Pub. 527. Form 982 to your federal income tax return for the insolvency exclusion), and 2020 and check the box on line 1d. Include the 2. His total adjusted basis of $4,000 in quali- Definition of qualified acquisition indebted- amount of canceled qualified real property busi- fied property he held at the beginning of ness. Qualified acquisition indebtedness is: ness debt (but not more than the amount of the 2021. • Debt incurred or assumed to acquire, con- exclusion limit, explained earlier) on line 2 of struct, reconstruct, or substantially improve Form 982. You must also reduce your tax attrib- Bob checks the boxes on lines 1b and 1c of real property that is used in a trade or busi- utes in Part II of Form 982 as explained under Form 982 and enters $10,000 on line 2. Bob ness and secures the debt, or Reduction of Tax Attributes, later. completes Part II to reduce his tax attributes as • Debt resulting from the refinancing of quali- If you timely filed your tax return without explained under Reduction of Tax Attributes, fied acquisition indebtedness, to the extent making this election, you can still make the later. Bob doesn't include any of his canceled the amount of the debt doesn't exceed the election by filing an amended return within 6 debt in income. amount of debt being refinanced. months of the due date of the return (excluding

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extensions). Enter “Filed pursuant to section under Insolvency, earlier) instead of applying 301.9100-2” on the amended return and file it at the qualified principal residence indebtedness the same place you filed the original return. Example 1—qualified principal resi- exclusion. To do this, check the box on line 1b dence indebtedness amount after refi- of Form 982 instead of the box on line 1e. Example—full qualified real property nance. In 2019, Becky bought a main home for business indebtedness exclusion. In 2014, $315,000. She took out a $300,000 mortgage Exclusion limit. The maximum amount you Curt bought a retail store for use in a business loan to buy the home and made a down pay- can treat as qualified principal residence indebt- he operated as a sole proprietorship. Curt made ment of $15,000. The loan was secured by the edness is $750,000 ($375,000 if married filing a $20,000 down payment and financed the re- home. Later that year, Becky took out a second separately). You can't exclude canceled quali- maining $200,000 of the purchase price with a mortgage loan in the amount of $50,000 that fied principal residence indebtedness from in- bank loan. The bank loan was a recourse loan she used to add a garage to her home. come if the cancellation was for services per- and was secured by the property. Curt used the In 2020, when the outstanding principal of formed for the lender or on account of any other property in his business continuously since he her first and second mortgage loans was factor not directly related to a decline in the bought it. He had no other debt secured by that $325,000, Becky refinanced the two loans into value of your home or to your financial condi- depreciable real property. In addition to the re- one loan in the amount of $400,000. The FMV tion. tail store, Curt owned depreciable equipment of the home at the time of the refinancing was and furniture with an adjusted basis of $50,000. $430,000. She used the additional $75,000 Ordering rule. If only a part of a loan is quali- Curt's business encountered financial diffi- debt proceeds ($400,000 new mortgage loan fied principal residence indebtedness, the ex- culties in 2020. On September 21, 2020, the minus $325,000 outstanding principal balances clusion applies only to the extent the amount bank financing the retail store loan entered into of her first and second mortgage loans immedi- canceled is more than the amount of the loan a workout agreement with Curt under which it ately before the refinancing) to pay off personal (immediately before the cancellation) that isn’t canceled $20,000 of the debt. Immediately be- credit cards and to pay college tuition for her qualified principal residence indebtedness. The fore the cancellation, the outstanding principal daughter. remaining part of the loan may qualify for an- balance on the retail store loan was $185,000, After the refinancing, Becky's qualified prin- other exclusion. the FMV of the store was $165,000, and the ad- cipal residence indebtedness is $325,000 be- justed basis was $210,000 ($220,000 cost mi- cause the $400,000 debt resulting from the refi- Example 3—ordering rule on cancella- nus $10,000 accumulated depreciation). nancing is qualified principal residence tion of nonqualified principal residence The bank sent him a 2020 Form 1099-C indebtedness only to the extent it isn't more debt. Ken incurred recourse debt of $800,000 showing discharged debt of $20,000 in box 2. than the old mortgage principal just before the when he bought his main home for $880,000. Curt had no tax attributes other than the basis refinancing (the $325,000 of outstanding princi- When the FMV of the property was $1 million, to reduce and didn't qualify for any exception or pal on Becky's first and second mortgages, Ken refinanced the debt for $850,000. At the exclusion other than the qualified real property which both qualified as principal residence in- time of the refinancing, the principal balance of business debt exclusion. debtedness). the original mortgage loan was $740,000. Ken Curt elects to apply the qualified real prop- used the $110,000 he obtained from the refi- erty business debt exclusion to the canceled Example 2—refinancing home equity nancing ($850,000 minus $740,000) to pay off debt. The amount of canceled qualified real loan used for other purposes. In 2019, his credit cards and to buy a new car. property business debt that he can exclude Steve acquired his main home for $200,000, About 2 years after the refinancing, Ken lost from income is limited. The amount he can ex- subject to a mortgage of $175,000. Later that his job and was unable to get another job pay- clude can’t be more than either: year, he took out a home equity loan for ing a comparable salary. Ken's home had de- $10,000, secured by his main home, which he clined in value to between $600,000 and 1. $20,000 (the excess of the $185,000 out- used to pay off personal credit cards. $650,000. Based on Ken's circumstances, the standing principal amount of his qualified In 2020, when the outstanding principal on lender agreed to allow a short sale of the prop- real property business debt immediately his mortgage was $170,000, and the outstand- erty for $620,000 and to cancel the remaining before the cancellation over the $165,000 ing principal on his home equity loan was $115,000 of the outstanding $735,000 debt. FMV of the business real property secur- $9,000, he refinanced the two loans into one Under the ordering rule, Ken can exclude only ing the debt), or loan in the amount of $200,000. The FMV of the $5,000 of the canceled debt from his income 2. $210,000 (the total adjusted basis of the home at the time of refinancing was $210,000. under the exclusion for canceled qualified prin- depreciable real property he held immedi- He used the additional $21,000 ($200,000 new cipal residence indebtedness ($115,000 can- ately before the cancellation). mortgage loan minus $179,000 outstanding celed debt minus the $110,000 amount of the principal balances on the mortgage and home debt that wasn't qualified principal residence in- . equity loan) to cover medical expenses. debtedness). Ken must include the remaining Thus, Curt can exclude the entire $20,000 of After refinancing, Steve's qualified principal $110,000 of canceled debt in income on canceled qualified real property business debt residence indebtedness is $170,000 because Schedule 1 (Form 1040), line 8 (unless another from income. Curt checks the box on line 1d of the debt resulting from the refinancing is quali- exclusion applies). Form 982 and enters $20,000 on line 2. Curt fied principal residence indebtedness only to must also use line 4 of Form 982 to reduce his the extent it refinances debt that had been se- How to report the qualified principal resi- basis in depreciable real property by the cured by the main home and was used to buy, dence indebtedness exclusion. To show $20,000 of canceled qualified real property build, or substantially improve the main home. that all or part of your canceled debt is excluded business debt excluded from his income as ex- from income because it is qualified principal plained under Reduction of Tax Attributes, later. Main home. Your main home is the one in residence indebtedness, attach Form 982 to which you live most of the time. You can have your federal income tax return and check the Qualified Principal only one main home at any one time. box on line 1e. On line 2 of Form 982, include the amount of canceled qualified principal resi- Residence Indebtedness Other exclusions must be applied before dence indebtedness, but not more than the the qualified principal residence indebted- amount of the exclusion limit (explained earlier). Qualified principal residence indebtedness is ness exclusion. This exclusion doesn't apply If you continue to own your home after a cancel- any mortgage you took out to buy, build, or sub- to a cancellation of debt in a title 11 bankruptcy lation of qualified principal residence indebted- stantially improve your main home. It must also case. If qualified principal residence indebted- ness, you must reduce your basis in the home be secured by your main home. Qualified princi- ness is canceled in a title 11 bankruptcy case, as explained under Reduction of Tax Attributes pal residence indebtedness also includes any you must apply the bankruptcy exclusion rather next. debt secured by your main home that you used than the exclusion for qualified principal resi- to refinance a mortgage you took out to buy, dence indebtedness. If you were insolvent im- build, or substantially improve your main home, mediately before the cancellation, you can elect but only up to the amount of the old mortgage to apply the insolvency exclusion (as explained principal just before the refinancing.

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On December 7, 2020, when the balance of she reduces it by $9 (the $100 excess in the loan was $8,500, the lender repossessed (3) multiplied by 0.09). Reduction of Tax and sold the car because Mya had stopped Attributes making payments on the loan. The FMV of the All other tax attributes. If the canceled debt car was $7,000 at the time the lender repos- is excluded by reason of the bankruptcy or in- sessed and sold it. The lender applied the solvency exclusions, you must use the exclu- If you exclude canceled debt from income, you $7,000 it received on the sale of the car against ded debt to reduce the following tax attributes must reduce certain tax attributes (but not be- Mya's loan and forgave the remaining loan bal- (but not below zero) in the order listed unless low zero) by the amount excluded. Use Part II of ance of $1,500 ($8,500 outstanding balance im- you elect to reduce the basis of depreciable Form 982 to reduce your tax attributes. The or- mediately before the repossession minus the property first, as explained later. Reduce your der in which the tax attributes are reduced de- $7,000 FMV of the car). tax attributes after you figure your income tax li- pends on the reason the canceled debt was ex- Mya's only other assets at the time of the ability for 2020. cluded from income. If the total amount of cancellation are the furniture in her apartment canceled debt excluded from income (line 2 of 1. Net operating loss (NOL). First reduce which has a basis of $5,000 and an FMV of Form 982) was more than your total tax attrib- any 2020 NOL and then reduce any NOL $3,000; jewelry with a basis of $500 and an utes, the total reduction of tax attributes in Part carryover to 2020 (after taking into ac- FMV of $1,000; and a $600 balance in her sav- II of Form 982 will be less than the amount on count any amount used to reduce 2020 ings account. Thus, the FMV of Mya's total as- line 2. taxable income) in the order of the tax sets immediately before the cancellation was years from which the carryovers arose, $11,600 ($7,000 car plus $3,000 furniture plus starting with the earliest year. Reduce the $1,000 jewelry plus $600 savings). Mya also Qualified Principal NOL or carryover by one dollar for each had an outstanding student loan balance of Residence Indebtedness dollar of excluded canceled debt. $6,000 immediately before the cancellation, bringing her total liabilities at that time to 2. General business credit carryover. Re- If you exclude canceled qualified principal resi- $14,500 ($8,500 balance on car loan plus duce the credit carryover to or from 2020. dence indebtedness from income and you con- $6,000 student loan balance). Other than the Reduce the credit carryovers to 2020 in tinue to own the home after the cancellation, car, which was repossessed, Mya held all of the order in which they are taken into ac- you must reduce the basis of the home (but not these assets at the beginning of 2021. The FMV count for 2020. For more information on below zero) by the amount of the canceled and basis of the assets remained the same at the credit ordering rules for 2020, see the qualified principal residence indebtedness ex- the beginning of 2021. Instructions for Form 3800, General Busi- cluded from income. Enter the amount of the Mya received a 2020 Form 1099-C showing ness Credit. Reduce the carryover by basis reduction on line 10b of Form 982. $1,500 in box 2 (amount of debt that was can- 331/3 cents for each dollar of excluded celed) and $7,000 in box 7 (FMV of the prop- canceled debt. For more details on determining the basis of erty). Mya can exclude all $1,500 of canceled your main home, see Pub. 523, Selling Your 3. Minimum tax credit. Reduce the mini- debt from income because at the time of the Home. mum tax credit available at the beginning cancellation, she was insolvent to the extent of of 2021. Reduce the credit by 331/3 cents $2,900 ($14,500 of total liabilities immediately for each dollar of excluded canceled debt. Bankruptcy and Insolvency before the cancellation minus $11,600 FMV of total assets at that time). 4. Net capital loss and capital loss carry- No tax attributes other than basis of per- Mya checks box 1b on Form 982 and enters overs. First reduce any 2020 net capital sonal-use property. If the canceled debt you $1,500 on line 2. She enters $100 on line 10a, loss and then any capital loss carryover to are excluding isn't excluded as qualified princi- the smallest of: 2020 (after taking into account any pal residence indebtedness and you have no amount used to reduce 2020 taxable in- 1. The $5,500 basis of her personal-use tax attributes other than the adjusted basis of come) in the order of the tax years from property held at the beginning of 2021 personal-use property (see the list of seven tax which the carryovers arose, starting with ($5,000 furniture plus $500 jewelry), attributes, later), you must reduce the basis of the earliest year. Reduce the net capital the personal-use property you held at the be- 2. The $1,500 nonbusiness debt she is ex- loss or carryover by one dollar for each ginning of 2021 (in proportion to adjusted ba- cluding from income on line 2 of Form 982, dollar of excluded canceled debt. sis). Personal-use property is any property that or 5. Basis. Reduce the basis of the property isn't used in your trade or business or held for 3. The $100 excess of the total basis of the you hold at the beginning of 2021 in the investment (such as your home, home furnish- property and the amount of money Mya following order (and, within each category, ings, and car). Include on line 10a of Form 982 held immediately after the cancellation in proportion to adjusted basis). the smallest of: over her total liabilities at that time ($5,500 a. Real property used in your trade or 1. The basis of your personal-use property basis of property held immediately after business or held for investment (other held at the beginning of 2021, the cancellation plus $600 savings minus than real property held for sale to cus- $6,000 student loan). 2. The amount of canceled nonbusiness debt tomers in the ordinary course of busi- (other than qualified principal residence in- Mya must reduce (by one dollar for each ness) if it secured the canceled debt. debtedness) that you are excluding from dollar of excluded canceled debt) her basis in b. Personal property used in your trade income on line 2 of Form 982, or each item of property she holds at the begin- or business or held for investment 3. The excess of the total basis of the prop- ning of 2021 in proportion to her total adjusted (other than inventory and accounts erty and the amount of money you held im- basis in all her property. The total reduction, and notes receivable) if it secured the mediately after the cancellation over your however, can't be more than (3) above—the canceled debt. total liabilities immediately after the can- $100 excess of her total adjusted basis and the c. Any other property used in your trade cellation. money she held after the cancellation over her total liabilities after the cancellation. See the ba- or business or held for investment For more information about the basis of sis attribute under All other tax attributes next. (other than inventory, accounts re- property, see Pub. 551. Thus, she reduces her basis as follows. ceivable, notes receivable, and real property held for sale to customers in 1. The furniture's basis is 91% of her total ad- Example. In 2019, Mya bought a car for the ordinary course of business). justed basis ($5,000 divided by $5,500), personal use. The cost of the car was $12,000. so she reduces it by $91 (the $100 excess d. Inventory, accounts receivable, notes Mya put down $2,000 and took out a loan of in (3) multiplied by 0.91). receivable, and real property held pri- $10,000 to buy the car. The loan was a re- marily for sale to customers in the or- course loan, meaning that Mya was personally 2. The jewelry’s basis is 9% of her total ad- dinary course of business. liable for the full amount of the debt. justed basis ($500 divided by $5,500), so

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e. Personal-use property (property not Recapture of basis reductions. If you reduce bank loan was a recourse loan and was se- used in your trade or business nor the basis of property under these provisions cured by the property. He used the property in held for investment). and later sell or otherwise dispose of the prop- his business continuously since he bought it erty at a gain, the part of the gain due to this ba- and had no other debt secured by that depreci- Reduce the basis by one dollar for sis reduction is taxable as ordinary income un- able real property. In addition to the retail store, each dollar of excluded canceled debt. der the depreciation recapture provisions. Treat Curt owned depreciable equipment and furni- However, the reduction can't be more than any property that isn't section 1245 or section ture with an adjusted basis of $50,000. His tax the excess of the total basis of the prop- 1250 property as section 1245 property. For attributes included the basis of depreciable erty and the amount of money you held im- section 1250 property, determine the deprecia- property, a net operating loss, and a capital loss mediately after the debt cancellation over tion adjustments that would have resulted under carryover to 2020. your total liabilities immediately after the the straight line method as if there were no ba- Curt's business encountered financial diffi- cancellation. sis reduction for debt cancellation. See Pub. culties in 2020. On September 21, 2020, the For allocation rules that apply to basis 544, Sales and Other Dispositions of Assets, or bank financing the retail store loan entered into reductions for multiple canceled debts, Pub. 225, Farmer's Tax Guide, for more details a workout agreement with him under which it see Regulations section 1.1017-1(b)(2). on sections 1245 and 1250 property and the re- canceled $20,000 of the principal amount of the Also see Election to reduce the basis of capture of gain as ordinary income. debt. Immediately before the bank entered into depreciable property before reducing the workout agreement, he was insolvent to the other tax attributes, later. Qualified Farm Indebtedness extent of $12,000. At that time, the outstanding 6. Passive activity loss and credit carry- principal balance on the retail store loan was overs. Reduce the passive activity loss $185,000, the FMV of the store was $165,000, and credit carryovers from 2020. Reduce If you exclude canceled debt from income un- and the adjusted basis was $210,000 the loss carryover by one dollar for each der both the insolvency exclusion and the ex- ($220,000 cost minus $10,000 accumulated de- dollar of excluded canceled debt. Reduce clusion for qualified farm indebtedness, you preciation). The bank sent him a 2020 Form must first reduce your tax attributes by the the credit carryover by 331/3 cents for each 1099-C showing canceled debt of $20,000 in dollar of excluded canceled debt. amount excluded under the insolvency exclu- box 2. sion. Then reduce your remaining tax attributes Curt must apply the insolvency exclusion 7. Foreign tax credit. Reduce the credit (but not below zero) by the amount of canceled before applying the exclusion for canceled carryover to or from 2020. Reduce the debt that qualifies for the farm debt exclusion. qualified real property business indebtedness. credit carryovers to 2020 in the order in Under the insolvency exclusion rules, he can which they are taken into account for In most cases, when reducing your tax at- exclude $12,000 of the canceled debt from in- 1 2020. Reduce the carryover by 33 /3 cents tributes for canceled qualified farm indebted- come. Curt elects to reduce his basis of depre- for each dollar of excluded canceled debt. ness excluded from income, reduce them in the ciable property before reducing other tax attrib- same order explained under Bankruptcy and In- utes. Under that election, he must first reduce Election to reduce the basis of depreciable solvency, earlier. However, don't follow the his basis in the depreciable real property used property before reducing other tax attrib- rules in item (5), Basis. Instead, reduce only the in his trade or business that secured the can- utes. You can elect to reduce the basis of de- basis of qualified property. Qualified property is celed debt. After the basis reduction, his adjus- preciable property you held at the beginning of any property you use or hold for use in your ted basis in that property is $198,000 ($210,000 2021 before reducing other tax attributes. You trade or business or for the production of in- adjusted basis before entering into the workout can reduce the basis of this property by all or come. Reduce the basis of qualified property in agreement minus $12,000 of canceled debt ex- part of the canceled debt. Basis of property is the following order. cluded from income under the insolvency exclu- reduced in the following order. 1. Depreciable qualified property. You can sion). 1. Depreciable real property used in your elect on Form 982 to treat real property Curt may be able to exclude the remaining trade or business or held for investment held primarily for sale to customers as if it $8,000 of canceled debt from income under the that secured the canceled debt. were depreciable property. exclusion for qualified real property business in- debtedness, if he elects to apply it. The amount 2. Depreciable personal property used in 2. Land that is qualified property and is used he can exclude is limited. It can’t be more than: your trade or business or held for invest- or held for use in your farming business. ment that secured the canceled debt. 1. $20,000 (the excess of the $185,000 out- 3. Other qualified property. standing principal amount of his qualified 3. Other depreciable property used in your real property business debt (immediately trade or business or held for investment. Qualified Real Property before the cancellation) over the $165,000 4. Real property held primarily for sale to Business Indebtedness FMV (immediately before the cancellation) customers if you elect to treat it as if it of the qualified real property, which se- were depreciable property on Form 982. cured the debt), or If you make an election to exclude canceled Basis reduction is limited to the total adjus- qualified real property business debt from in- 2. $198,000 (the total adjusted basis of de- ted basis of all your depreciable property. De- come, you must reduce the basis of your depre- preciable real property he held immedi- preciable property for this purpose means any ciable real property (but not below zero) by the ately before the cancellation determined property subject to depreciation or amortization, amount of canceled qualified real property busi- after reductions for accumulated deprecia- but only if a reduction of basis will reduce the ness debt excluded from income. The basis re- tion and canceled debt excluded under depreciation or amortization otherwise allowa- duction is made at the beginning of 2021. How- the insolvency exclusion ($220,000 minus ble for the period immediately following the ba- ever, if you dispose of your depreciable real $10,000 minus $12,000)). sis reduction. If the amount of canceled debt property before the beginning of 2021, you Since both limits are more than the $8,000 excluded from income is more than the total ba- must reduce its basis (but not below zero) im- of remaining canceled debt ($20,000 minus sis in depreciable property, you must use the mediately before the disposition. Enter the $12,000), Curt can exclude $8,000 under the excess to reduce the other tax attributes in the amount of the basis reduction on line 4 of Form qualified real property business indebtedness order described earlier under All other tax attrib- 982. exclusion. utes. In figuring the limit on the basis reduction Curt checks the boxes on lines 1b and 1d of in (5), Basis, use the remaining adjusted basis Example 1—qualified real property busi- Form 982. He completes Part II of Form 982 to of your properties after making this election. ness indebtedness and insolvency with re- reduce his basis in the depreciable real prop- See Form 982 for information on how to make duction in basis. In 2015, Curt bought a retail erty by $20,000, the amount of the canceled this election. The election can be revoked only store for use in a business he operated as a debt excluded from income. He enters $8,000 with IRS consent. sole proprietorship. Curt made a $20,000 down on line 4 and $12,000 on line 5. payment and financed the remaining $200,000 of the purchase price with a bank loan. The

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Example 2—qualified real property busi- the lender. If the outstanding loan balance was loan and the house secures the loan. In 2020, ness indebtedness with insolvency and re- more than the FMV of the property and the the bank foreclosed on the mortgage because duction in NOL. Bob owns depreciable real lender cancels all or part of the remaining loan Lili stopped making payments. When the bank property used in his retail business. His adjus- balance, you may also realize ordinary income foreclosed the mortgage, the balance due was ted basis in the property is $145,000. The FMV from the cancellation of debt. You must report $180,000, the FMV of the house was $170,000, of the property is $120,000. The property is this income on your return unless certain excep- and Lili's adjusted basis was $175,000 due to a subject to $134,000 of recourse debt which is tions or exclusions apply. See chapter 1 for casualty loss she had deducted. At the time of secured by the property. Bob had no other debt more details. the foreclosure, the bank forgave $2,000 of the secured by that depreciable real property. Bob $10,000 debt in excess of the FMV ($180,000 also had a $15,000 NOL in 2020. Foreclosure moratorium and right to re- minus $170,000). She remained personally lia- During 2020, Bob entered into a workout quest forbearance. If you have a primary ble for the $8,000 balance. agreement with the lender under which the and/or secondary federally insured or guaran- In this case, Lili has ordinary income from lender canceled $14,000 of the debt on the real teed mortgage loan on your primary residence the cancellation of debt in the amount of property used in his business. Immediately be- and suffered financial hardship during the coro- $2,000. The $2,000 income from the cancella- fore the cancellation, Bob was insolvent to the navirus emergency, you are protected from tion of debt is figured by subtracting the extent of $10,000. He excludes $10,000 of the foreclosure for a period of 180 days if you noti- $170,000 FMV of the house from the $172,000 canceled debt from income under the insol- fied the servicer of that loan. Within the initial difference between her total outstanding debt vency exclusion. As a result of that exclusion, 180-day forbearance period, you may also re- immediately before the transfer of property and he reduced his NOL by $10,000. quest an additional 180 days of forbearance by the amount for which she remains personally li- Bob may be able to exclude the remaining notifying the servicer of the same circumstan- able immediately after the transfer ($180,000 $4,000 of canceled debt from income under the ces and reasons. minus $8,000). She is able to exclude the qualified real property business indebtedness During the period of the forbearance, no $2,000 of canceled debt from her income under exclusion, if he elects to apply it. The amount fees, penalties, or interest shall be assessed the qualified principal residence indebtedness he can exclude is limited. It can't be more than: beyond the amounts scheduled or calculated as rules discussed earlier. if you had made all contractual payments on Lili also must determine her gain or loss 1. $14,000 (the excess of the $134,000 out- time and in full under the terms of the mortgage from the foreclosure. In this case, the amount standing principal amount of his qualified contract. that she realizes is $170,000. This is the smaller real property business debt (immediately of: before the cancellation) over the $120,000 Borrower's gain or loss. You figure and re- FMV (immediately before the cancellation) 1. $172,000 (the $180,000 of outstanding port gain or loss from a foreclosure or reposses- of that qualified real property, which se- debt immediately before the transfer mi- sion in the same way as gain or loss from a cured the debt), or nus $8,000 for which she remains person- sale. The gain is the difference between the ally liable immediately after the transfer), 2. $145,000 (the total adjusted basis of de- amount realized and your adjusted basis in the or preciable real property held immediately transferred property (amount realized minus ad- before the cancellation of debt). justed basis). The loss is the difference be- 2. $170,000 (the FMV of the house). tween your adjusted basis in the transferred Since both limits ($14,000 and $145,000) property and the amount realized (adjusted ba- Lili figures her gain or loss on the foreclo- are more than the remaining $4,000 of can- sis minus amount realized). For more informa- sure by comparing the $170,000 amount real- celed debt, Bob can also exclude the remaining tion on figuring gain or loss from the sale of ized with her $175,000 adjusted basis. She has $4,000 of canceled debt. property, see Gain or Loss From Sales and Ex- a $5,000 nondeductible loss. Bob checks the boxes on lines 1b and 1d of changesin Pub. 544. Form 982 and enters $14,000 on line 2. Bob Example 2. Tara bought a new car for completes Part II of Form 982 to reduce his ba- You can use Table 1-1 to figure your $15,000. She made a $2,000 down payment sis of depreciable real property and his 2020 TIP ordinary income from the cancellation and borrowed the remaining $13,000 from the NOL by entering $4,000 on line 4 and $10,000 of debt and your gain or loss from a dealer's credit company. Tara is personally lia- on line 6. None of the canceled debt is included foreclosure or repossession. ble for the loan (recourse debt) and the car is in his income. pledged as security for the loan. On August 3, Amount realized and ordinary income 2020, the credit company repossessed the car on a recourse debt. If you are personally lia- because Tara had stopped making loan pay- ble for the debt, the amount realized on the ments. The balance due after taking into ac- foreclosure or repossession includes the count the payments Tara made was $10,000. smaller of: The FMV of the car when it was repossessed was $9,000. On November 16, 2020, the credit 1. The outstanding debt immediately before company forgave the remaining $1,000 balance the transfer reduced by any amount for on the loan due to insufficient assets. which you remain personally liable imme- In this case, the amount Tara realizes is diately after the transfer, or $9,000. This is the smaller of: 2. The FMV of the transferred property. 2. 1. $9,000 (the $10,000 outstanding debt im- The amount realized also includes any pro- mediately before the repossession minus ceeds you received from the foreclosure sale. If the $1,000 for which she remains person- the FMV of the transferred property is less than ally liable immediately after the reposses- Foreclosures the total outstanding debt immediately before sion), or the transfer reduced by any amount for which 2. $9,000 (the FMV of the car). and you remain personally liable immediately after the transfer, the difference is ordinary income Tara figures her gain or loss on the repos- from the cancellation of debt. You must report session by comparing the $9,000 amount real- Repossessions this income on your return unless certain excep- ized with her $15,000 adjusted basis. She has a tions or exclusions apply. See chapter 1 for $6,000 nondeductible loss. After the cancella- If you don't make payments you owe on a loan more details. tion of the remaining balance on the loan in No- secured by property, the lender may foreclose vember, Tara also has ordinary income from on the loan or repossess the property. The fore- Example 1. In 2019, Lili paid $200,000 for cancellation of debt in the amount of $1,000 closure or repossession is treated as a sale her home. She made a $15,000 down payment (the remaining balance on the $10,000 loan af- from which you may realize gain or loss. This is and borrowed the remaining $185,000 from a ter the $9,000 amount satisfied by the FMV of true even if you voluntarily return the property to bank. Lili is personally liable for the mortgage the repossessed car). Tara must report this

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Table 1-1. Worksheet for Foreclosures and Whether an abandonment has occurred is de- Repossessions Keep for Your Records termined in light of all the facts and circumstan- ces. You must both show an intention to aban- Part 1. Complete Part 1 only if you were personally liable for the debt (even if none of the debt was don the property and affirmatively act to canceled). Otherwise, go to Part 2. abandon the property.

1. Enter the amount of outstanding debt immediately before the transfer of A voluntary conveyance of the property in lieu property reduced by any amount for which you remain personally liable of foreclosure isn’t an abandonment and is trea-

immediately after the transfer of property ...... ted as the exchange of property to satisfy a 2. Enter the fair market value of the transferred property ...... debt. For more information, see Sales and Ex- 3. Ordinary income from the cancellation of debt upon foreclosure or changes in Pub. 544. repossession.* Subtract line 2 from line 1. If less than zero, enter zero. Next, go to Part 2 ...... The tax consequences of abandonment of property that secures a debt depend on Part 2. Gain or loss from foreclosure or repossession. whether you were personally liable for the debt (recourse debt) or weren’t personally liable for 4. Enter the smaller of line 1 or line 2. If you didn't complete Part 1 (because you the debt (nonrecourse debt). weren't personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property ...... See Pub. 544 if you abandoned prop- 5. Enter any proceeds you received from the foreclosure sale ...... TIP erty that didn't secure debt. This publi- cation only discusses the tax conse- 6. Add line 4 and line 5 ...... quences of abandoning property that secured a 7. Enter the adjusted basis of the transferred property ...... debt. 8. Gain or loss from foreclosure or repossession. Subtract line 7 from line 6 ...... Abandonment of property securing re- course debt. In most cases, if you abandon * The income may not be taxable. See chapter 1 for more details. property that secures debt for which you are personally liable (recourse debt), you don't $1,000 on her return unless one of the excep- The amount Tara realized on the reposses- have gain or loss until the later foreclosure is tions or exclusions described in chapter 1 ap- sion is $10,000. That is the outstanding amount completed. For details on figuring gain or loss plies. of debt immediately before the repossession, on the foreclosure, see chapter 2. even though the FMV of the car is less than $10,000. Tara figures her gain or loss on the re- Amount realized on a nonrecourse debt. Example 1—abandonment of per- possession by comparing the $10,000 amount If you aren't personally liable for repaying the sonal-use property securing recourse debt. realized with her $15,000 adjusted basis. Tara debt secured by the transferred property, the In 2016, Anne purchased a home for $200,000. has a $5,000 nondeductible loss. amount you realize includes the full amount of She borrowed the entire purchase price, for the outstanding debt immediately before the which she was personally liable, and gave the Forms 1099-A and 1099-C. A lender who ac- transfer. This is true even if the FMV of the bank a mortgage on the home. In 2020, Anne quires an interest in your property in a foreclo- property is less than the outstanding debt im- lost her job and was unable to continue making sure or repossession should send you Form mediately before the transfer. her mortgage loan payments. Because her 1099-A, Acquisition or Abandonment of Se- mortgage loan balance was $185,000 and the cured Property, showing information you need Example 1. Lili paid $200,000 for her FMV of her home was only $150,000, Anne de- to figure your gain or loss. However, if the home. She made a $15,000 down payment and cided to abandon her home by permanently lender also cancels part of your debt and must borrowed the remaining $185,000 from a bank. moving out on August 1, 2020. Because Anne file Form 1099-C, the lender can include the in- She isn't personally liable for the loan, but the was personally liable for the debt and the bank formation about the foreclosure or repossession loan was secured by a mortgage on the house. didn't complete a foreclosure of the property in on that form instead of on Form 1099-A. The The bank foreclosed on the mortgage be- 2020, Anne has neither gain nor loss in tax year lender must file Form 1099-C and send you a cause Lili stopped making payments. When the 2020 from abandoning the home. If the bank copy if the amount of debt canceled is $600 or bank foreclosed on the mortgage, the balance sells the house at a foreclosure sale in 2021, more and the lender is a financial institution, due was $180,000, the FMV of the house was Anne will have to figure her gain or nondeducti- credit union, federal government agency, or $170,000, and Lili's adjusted basis was ble loss for tax year 2021 as discussed earlier in other applicable entity as discussed earlier in $175,000 due to a casualty loss she had deduc- chapter 2. ted. chapter 1. For foreclosures or repossessions occurring in 2020, these forms should be sent The amount Lili realized on the foreclosure Example 2—abandonment of business to you by February 1, 2021. is $180,000, the outstanding debt immediately or investment property securing recourse before the foreclosure. She figures her gain or debt. In 2016, Sue purchased business prop- loss by comparing the $180,000 amount real- erty for $200,000. She borrowed the entire pur- ized with her $175,000 adjusted basis. Lili has a chase price, for which she was personally lia- $5,000 realized gain. See Pub. 523, Selling ble, and gave the lender a security interest in Your Home, to figure and report any taxable the property. In 2020, Sue was unable to con- amount. tinue making her loan payments. Because her 3. loan balance was $185,000 and the FMV of the Example 2. Tara bought a new car for property was only $150,000, Sue abandoned $15,000. She made a $2,000 down payment the property on August 1, 2020. Because Sue and borrowed the remaining $13,000 from the was personally liable for the debt and the lender dealer's credit company. Tara isn't personally li- Abandonments didn't complete a foreclosure of the property in able for the loan (nonrecourse), but pledged the 2020, Sue has neither gain nor loss in tax year new car as security for the loan. You abandon property when you voluntarily and 2020 from abandoning the property. If the On August 3, 2020, the credit company re- permanently give up possession and use of the lender sells the property at a foreclosure sale in possessed the car because Tara had stopped property with the intention of ending your own- 2021, Sue will have to figure her gain or deduc- making loan payments. The balance due after ership but without passing it on to anyone else. tible loss for tax year 2021 as discussed earlier taking into account the payments Tara made in chapter 2. was $10,000. The FMV of the car when it was repossessed was $9,000. Abandonment of property securing nonre- course debt. If you abandon property that

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secures debt for which you aren't personally lia- liable for the debt, he also has no cancellation filing your return online or in your local commun- ble (nonrecourse debt), the abandonment is of debt income. ity, if you qualify, which include the following. treated as a sale or exchange. • Free File. This program lets you prepare The amount you realize on the abandon- Canceled debt. If the abandoned property se- and file your federal individual income tax ment of property that secured nonrecourse debt cures a debt for which you are personally liable return for free using brand-name tax-prep- is the amount of the nonrecourse debt. If the and the debt is canceled, you will realize ordi- aration-and-filing software or Free File filla- amount you realize is more than your adjusted nary income equal to the canceled debt. This ble forms. However, state tax preparation basis, then you have a gain. If your adjusted ba- income is separate from any amount realized may not be available through Free File. Go sis is more than the amount you realize, then from abandonment of the property. You must to IRS.gov/FreeFile to see if you qualify for you have a loss. For more information on how report this income on your return unless one of free online federal tax preparation, e-filing, to figure gain and loss, see Gain or Loss From the exceptions or exclusions described in chap- and direct deposit or payment options. Sales and Exchanges in Pub. 544. ter 1 applies. • VITA. The Volunteer Income Tax Assis- Loss from abandonment of business or in- tance (VITA) program offers free tax help vestment property is deductible as a loss. The Forms 1099-A and 1099-C. In most cases, if to people with low-to-moderate incomes, character of the loss depends on the character you abandon: persons with disabilities, and limited-Eng- of the property. The amount of deductible capi- • real property (such as a home), lish-speaking taxpayers who need help tal loss may be limited. For more information, • intangible property, or preparing their own tax returns. Go to see Treatment of Capital Losses in Pub. 544. • tangible personal property held (wholly or IRS.gov/VITA, download the free IRS2Go You can't deduct any loss from abandonment of partly) for use in a trade or business or for app, or call 800-906-9887 for information your home or other property held for personal investment on free tax return preparation. use. that secures a loan and the lender knows the • TCE. The Tax Counseling for the Elderly property has been abandoned, the lender (TCE) program offers free tax help for all Example 1—abandonment of per- should send you Form 1099-A showing infor- taxpayers, particularly those who are 60 sonal-use property securing nonrecourse mation you need to figure your gain or loss from years of age and older. TCE volunteers debt. In 2016, Timothy purchased a home for the abandonment. Also, if your debt is canceled specialize in answering questions about $200,000. He borrowed the entire purchase and the lender must file Form 1099-C, the pensions and retirement-related issues price, for which he wasn't personally liable, and lender can include the information about the unique to seniors. Go to IRS.gov/TCE, gave the bank a mortgage on the home. In abandonment on that form instead of on Form download the free IRS2Go app, or call 2020, Timothy lost his job and was unable to 1099-A. The lender must file Form 1099-C and 888-227-7669 for information on free tax continue making his mortgage loan payments. send you a copy if the amount of debt canceled return preparation. Because his mortgage loan balance was is $600 or more and the lender is a financial in- • MilTax. Members of the U.S. Armed $185,000 and the FMV of his home was only stitution, credit union, federal government Forces and qualified veterans may use Mil- $150,000, Timothy decided to abandon his agency, or other applicable entity as discussed Tax, a free tax service offered by the De- home by permanently moving out on August 1, earlier in chapter 1. partment of Defense through Military One- 2020. Because Timothy wasn't personally liable For abandonments of property and debt Source. for the debt, the abandonment is treated as a cancellations occurring in 2020, these forms Also, the IRS offers Free Fillable sale or exchange of the home in tax year 2020. should be sent to you by February 1, 2021. Forms, which can be completed online and Timothy's amount realized is $185,000 and his then filed electronically regardless of in- adjusted basis in the home is $200,000. Timo- come. thy has a $15,000 nondeductible loss in tax year 2020. (Had Timothy’s adjusted basis been Using online tools to help prepare your re- less than the amount realized, Timothy would turn. Go to IRS.gov/Tools for the following. have had a gain that he would have to include • The Earned Income Tax Credit Assistant in gross income.) The bank sells the house at a (IRS.gov/EITCAssistant) determines if foreclosure sale in 2021. Timothy has neither 4. you’re eligible for the earned income credit gain nor loss from the foreclosure sale. Be- (EIC). cause he wasn't personally liable for the debt, • The Online EIN Application (IRS.gov/EIN) he also has no cancellation of debt income. helps you get an employer identification How To Get Tax number (EIN). Example 2—abandonment of business • The Tax Withholding Estimator (IRS.gov/ or investment property securing nonre- Help W4app) makes it easier for everyone to course debt. In 2016, Robert purchased busi- pay the correct amount of tax during the ness property for $200,000. He borrowed the If you have questions about a tax issue, need year. The tool is a convenient, online way entire purchase price, for which he wasn't per- help preparing your tax return, or want to down- to check and tailor your withholding. It’s sonally liable, and gave the lender a security in- load free publications, forms, or instructions, go more user-friendly for taxpayers, including terest in the property. In 2020, Robert was un- to IRS.gov and find resources that can help you retirees and self-employed individuals. The able to continue making his loan payments. right away. features include the following. Because his loan balance was $185,000 and – Easy to understand language. the FMV of the property was only $150,000, Preparing and filing your tax return. After – The ability to switch between screens, Robert decided to abandon the property on Au- receiving all your wage and earnings state- correct previous entries, and skip gust 1, 2020. Because Robert wasn't personally ments (Form W-2, W-2G, 1099-R, 1099-MISC, screens that don’t apply. liable for the debt, the abandonment is treated 1099-NEC, etc.); unemployment compensation – Tips and links to help you determine if as a sale or exchange of the property in tax year statements (by mail or in a digital format) or you qualify for tax credits and deduc- 2020. Robert's amount realized is $185,000 other government payment statements (Form tions. and his adjusted basis in the property is 1099-G); and interest, dividend, and retirement – A progress tracker. $180,000 (as a result of $20,000 of depreciation statements from banks and investment firms – A self-employment tax feature. deductions on the property). Robert has a (Forms 1099), you have several options to – Automatic calculation of taxable social $5,000 gain in tax year 2020. (Had Robert’s ad- choose from to prepare and file your tax return. security benefits. justed basis been greater than the amount real- You can prepare the tax return yourself, see if • The First Time Homebuyer Credit Account ized, he would have had a deductible loss.) The you qualify for free tax preparation, or hire a tax Look-up (IRS.gov/HomeBuyer) tool pro- lender sells the property at a foreclosure sale in professional to prepare your return. vides information on your repayments and 2021. Robert has neither gain nor loss from the account balance. foreclosure sale. Because he wasn't personally Free options for tax preparation. Go to IRS.gov to see your options for preparing and

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• The Sales Tax Deduction Calculator information with you. Don’t post your SSN or fected if your SSN is used to file a fraudu- (IRS.gov/SalesTax) figures the amount you other confidential information on social media lent return or to claim a refund or credit. can claim if you itemize deductions on sites. Always protect your identity when using • The IRS doesn’t initiate contact with tax- Schedule A (Form 1040). any social networking site. payers by email, text messages, telephone Getting answers to your tax ques- The following IRS YouTube channels pro- calls, or social media channels to request tions. On IRS.gov, you can get vide short, informative videos on various tax-re- personal or financial information. This in- up-to-date information on current lated topics in English, Spanish, and ASL. cludes requests for personal identification Youtube.com/irsvideos. events and changes in tax law. • numbers (PINs), passwords, or similar in- • Youtube.com/irsvideosmultilingua. formation for credit cards, banks, or other • IRS.gov/Help: A variety of tools to help you • Youtube.com/irsvideosASL. financial accounts. get answers to some of the most common • Go to IRS.gov/IdentityTheft, the IRS Iden- tax questions. Watching IRS videos. The IRS Video portal tity Theft Central webpage, for information • IRS.gov/ITA: The Interactive Tax Assistant, (IRSVideos.gov) contains video and audio pre- on identity theft and data security protec- a tool that will ask you questions on a num- sentations for individuals, small businesses, tion for taxpayers, tax professionals, and ber of tax law topics and provide answers. and tax professionals. businesses. If your SSN has been lost or • IRS.gov/Forms: Find forms, instructions, stolen or you suspect you’re a victim of and publications. You will find details on Online tax information in other languages. tax-related identity theft, you can learn 2020 tax changes and hundreds of interac- You can find information on IRS.gov/ what steps you should take. tive links to help you find answers to your MyLanguage if English isn’t your native lan- • Get an Identity Protection PIN (IP PIN). IP questions. guage. PINs are six-digit numbers assigned to eli- • You may also be able to access tax law in- gible taxpayers to help prevent the misuse Free interpreter service. Multilingual assis- formation in your electronic filing software. of their SSNs on fraudulent federal income tance, provided by the IRS, is available at Tax- tax returns. When you have an IP PIN, it payer Assistance Centers (TACs) and other prevents someone else from filing a tax re- Need someone to prepare your tax return? IRS offices. Over-the-phone interpreter service turn with your SSN. To learn more, go to There are various types of tax return preparers, is accessible in more than 350 languages. including tax preparers, enrolled agents, certi- IRS.gov/IPPIN. fied public accountants (CPAs), attorneys, and Getting tax forms and publications. Go to Checking on the status of your refund. many others who don’t have professional cre- IRS.gov/Forms to view, download, or print all of • Go to IRS.gov/Refunds. dentials. If you choose to have someone pre- the forms, instructions, and publications you • The IRS can’t issue refunds before pare your tax return, choose that preparer may need. You can also download and view mid-February 2021 for returns that claimed wisely. A paid tax preparer is: popular tax publications and instructions (in- the EIC or the additional child tax credit • Primarily responsible for the overall sub- cluding the Instructions for Forms 1040 and (ACTC). This applies to the entire refund, stantive accuracy of your return, 1040-SR) on mobile devices as an eBook at not just the portion associated with these • Required to sign the return, and IRS.gov/eBooks. Or you can go to IRS.gov/ credits. • Required to include their preparer tax iden- OrderForms to place an order. Download the official IRS2Go app to your tification number (PTIN). • mobile device to check your refund status. Access your online account (individual tax- Call the automated refund hotline at Although the tax preparer always signs the re- payers only). Go to IRS.gov/Account to se- • 800-829-1954. turn, you're ultimately responsible for providing curely access information about your federal tax all the information required for the preparer to account. Making a tax payment. The IRS uses the lat- accurately prepare your return. Anyone paid to View the amount you owe, pay online, or • est encryption technology to ensure your elec- prepare tax returns for others should have a set up an online payment agreement. tronic payments are safe and secure. You can thorough understanding of tax matters. For Access your tax records online. • make electronic payments online, by phone, more information on how to choose a tax pre- Review your payment history. • and from a mobile device using the IRS2Go parer, go to Tips for Choosing a Tax Preparer Go to IRS.gov/SecureAccess to review the • app. Paying electronically is quick, easy, and on IRS.gov. required identity authentication process. faster than mailing in a check or money order. Go to IRS.gov/Payments for information on how Coronavirus. Go to IRS.gov/Coronavirus for Using direct deposit. The fastest way to re- to make a payment using any of the following links to information on the impact of the corona- ceive a tax refund is to file electronically and options. virus, as well as tax relief available for individu- choose direct deposit, which securely and elec- IRS Direct Pay: Pay your individual tax bill als and families, small and large businesses, tronically transfers your refund directly into your • or estimated tax payment directly from and tax-exempt organizations. financial account. Direct deposit also avoids the your checking or savings account at no possibility that your check could be lost, stolen, cost to you. Tax reform. Tax reform legislation affects indi- or returned undeliverable to the IRS. Eight in 10 Debit or Credit Card: Choose an approved viduals, businesses, and tax-exempt and gov- taxpayers use direct deposit to receive their re- • payment processor to pay online, by ernment entities. Go to IRS.gov/TaxReform for funds. The IRS issues more than 90% of re- phone, or by mobile device. information and updates on how this legislation funds in less than 21 days. affects your taxes. • Electronic Funds Withdrawal: Offered only when filing your federal taxes using tax re- Getting a transcript of your return. The turn preparation software or through a tax Employers can register to use Business quickest way to get a copy of your tax transcript professional. Services Online. The Social Security Adminis- is to go to IRS.gov/Transcripts. Click on either Electronic Federal Tax Payment System: tration (SSA) offers online service at SSA.gov/ “Get Transcript Online” or “Get Transcript by • Best option for businesses. Enrollment is employer for fast, free, and secure online W-2 Mail” to order a free copy of your transcript. If required. filing options to CPAs, accountants, enrolled you prefer, you can order your transcript by call- Check or Money Order: Mail your payment agents, and individuals who process Form W-2, ing 800-908-9946. • Wage and Tax Statement, and Form W-2c, to the address listed on the notice or in- Corrected Wage and Tax Statement. Reporting and resolving your tax-related structions. identity theft issues. • Cash: You may be able to pay your taxes IRS social media. Go to IRS.gov/SocialMedia • Tax-related identity theft happens when with cash at a participating retail store. to see the various social media tools the IRS someone steals your personal information • Same-Day Wire: You may be able to do uses to share the latest information on tax to commit tax fraud. Your taxes can be af- same-day wire from your financial institu- changes, scam alerts, initiatives, products, and tion. Contact your financial institution for services. At the IRS, privacy and security are availability, cost, and cut-off times. paramount. We use these tools to share public

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What if I can’t pay now? Go to IRS.gov/ service you need without long wait times. Be- • You’ve tried repeatedly to contact the IRS Payments for more information about your op- fore you visit, go to IRS.gov/TACLocator to find but no one has responded, or the IRS tions. the nearest TAC and to check hours, available hasn’t responded by the date promised. • Apply for an online payment agreement services, and appointment options. Or, on the (IRS.gov/OPA) to meet your tax obligation IRS2Go app, under the Stay Connected tab, How Can You Reach TAS? in monthly installments if you can’t pay choose the Contact Us option and click on “Lo- your taxes in full today. Once you complete cal Offices.” TAS has offices in every state, the District of the online process, you will receive imme- Columbia, and Puerto Rico. Your local advo- diate notification of whether your agree- cate’s number is in your local directory and at ment has been approved. The Taxpayer Advocate TaxpayerAdvocate.IRS.gov/Contact-Us. You • Use the Offer in Compromise Pre-Qualifier can also call them at 877-777-4778. to see if you can settle your tax debt for Service (TAS) Is Here To less than the full amount you owe. For more information on the Offer in Compro- Help You How Else Does TAS Help mise program, go to IRS.gov/OIC. Taxpayers? What Is TAS? Filing an amended return. You can now file TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of Form 1040-X electronically with tax filing soft- TAS is an independent organization within the ware to amend 2019 Forms 1040 and 1040-SR. these broad issues, please report it to them at IRS that helps taxpayers and protects taxpayer IRS.gov/SAMS. To do so, you must have e-filed your original rights. Their job is to ensure that every taxpayer 2019 return. Amended returns for all prior years is treated fairly and that you know and under- must be mailed. See Tips for taxpayers who stand your rights under the Taxpayer Bill of TAS for Tax Professionals need to file an amended tax return and go to Rights. IRS.gov/Form1040X for information and up- TAS can provide a variety of information for tax dates. professionals, including tax law updates and How Can You Learn About Your guidance, TAS programs, and ways to let TAS Checking the status of your amended re- Taxpayer Rights? know about systemic problems you’ve seen in turn. Go to IRS.gov/WMAR to track the status your practice. of Form 1040-X amended returns. Please note The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with that it can take up to 3 weeks from the date you Low Income Taxpayer filed your amended return for it to show up in the IRS. Go to TaxpayerAdvocate.IRS.gov to our system, and processing it can take up to 16 help you understand what these rights mean to Clinics (LITCs) weeks. you and how they apply. These are your rights. Know them. Use them. LITCs are independent from the IRS. LITCs Understanding an IRS notice or letter represent individuals whose income is below a you’ve received. Go to IRS.gov/Notices to What Can TAS Do For You? certain level and need to resolve tax problems find additional information about responding to with the IRS, such as audits, appeals, and tax an IRS notice or letter. TAS can help you resolve problems that you collection disputes. In addition, clinics can pro- can’t resolve with the IRS. And their service is vide information about taxpayer rights and re- Contacting your local IRS office. Keep in free. If you qualify for their assistance, you will sponsibilities in different languages for individu- mind, many questions can be answered on be assigned to one advocate who will work with als who speak English as a second language. IRS.gov without visiting an IRS Taxpayer Assis- you throughout the process and will do every- Services are offered for free or a small fee for tance Center (TAC). Go to IRS.gov/LetUsHelp thing possible to resolve your issue. TAS can eligible taxpayers. To find a clinic near you, visit for the topics people ask about most. If you still help you if: www.TaxpayerAdvocate.IRS.gov/about-us/ need help, IRS TACs provide tax help when a • Your problem is causing financial difficulty Low-Income-Taxpayer-Clinics-LITC/ or see IRS tax issue can’t be handled online or by phone. for you, your family, or your business; Pub. 4134, Low Income Taxpayer Clinic List. All TACs now provide service by appointment, • You face (or your business is facing) an so you’ll know in advance that you can get the immediate threat of adverse action; or

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To help us develop a more useful index, please let us know if you have ideas for index entries. Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

Income from 3 Qualified principal residence 1099-C 4 Co-owners 4 I indebtedness 9 Income from canceled debt 3 Examples 9 Insolvency 5 Qualified real property business A D Reduction of tax attributes 10 indebtedness 8 Abandonments 13 Debts: Reduction of tax attributes 11 Canceled debt 14 Stockholder's 4 Assistance (See Tax help) Definitions: L Adjusted tax attributes 7 Limits: R Qualified acquisition Excluded farm debt 7 Real property business B indebtedness 8 Qualified real property business indebtedness 8 Bankruptcy 5 Qualified farm indebtedness 7 indebtedness 8 Recapture: Reduction of tax attributes 10 Qualified principal residence Loans: Basis reductions 11 Business: indebtedness 9 Student 4 Repossessions 12 Real property indebtedness 8 Qualified real property business indebtedness 8 M S C Missing children, photographs Stockholder debts 4 Canceled debt 4 E of 2 Student loans 4 Exceptions: Educational loans 4 Mortgage Debt Relief Deductible debt 5 Act (See Qualified Principal Gifts 4 Residence Indebtedness) T Price reduced after F Tax attributes, reduction of: purchase 5 Farm indebtedness 7 Bankruptcy 10 Student loans 4 Reduction of tax attributes 11 P Insolvency 10 Exclusions: Foreclosures 12 Principal residence Qualified farm indebtedness 11 Bankruptcy 5 Form: indebtedness 9 Qualified Principal Residence Insolvency 5 1099-A 13, 14 Publications (See Tax help) Indebtedness 10 Qualified farm 1099-C 13, 14 Qualified real property business indebtedness 7 indebtedness 11 Qualified principal residence Q Tax help 14 indebtedness 9 G Qualified farm indebtedness 7 Qualified real property Gifts 4 Reduction of tax attributes 11 business indebtedness 8

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