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previous page Previous Page: Publication 4681 - Canceled Debts, Foreclosures, Repossessions, and Abandonments (For Individuals) - Canceled Debts
next page Next Page: Publication 4681 - Canceled Debts, Foreclosures, Repossessions, and Abandonments (For Individuals) - Reduction of Tax Attributes
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication
taxmap/pubs/p4681-002.htm#en_us_publink100080239

Exclusions(p4)


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previous topic occurrence Exclusions next topic occurrence

There are several exclusions from the general rule of inclusion of canceled debt in income. These are explained next. Generally, if you exclude canceled debt from income under one of these provisions, you must also reduce your tax attributes (certain credits, losses, and basis of assets) as explained later under Reduction of Tax Attributes.
EIC
If you made an election under section 108(i) to defer and ratably include income from the cancellation of business debt arising from the reacquisition of certain business debt repurchased in 2009 and 2010, you cannot exclude for the taxable year of the election or any subsequent taxable year the income from the cancellation of such indebtedness based on a title 11 bankruptcy case, insolvency, qualified farm indebtedness, or qualified real property business indebtedness. For more details, see section 108(i).
taxmap/pubs/p4681-002.htm#en_us_publink100080240

Bankruptcy(p4)


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Bankruptcy

Debt canceled in a title 11 bankruptcy case is not included in your income. A title 11 bankruptcy case is a case under title 11 of the United States Code, but only if the debtor is under the jurisdiction of the court and the cancellation of the debt is granted by the court or occurs as a result of a plan approved by the court.
taxmap/pubs/p4681-002.htm#en_us_publink100080241

How to report the bankruptcy exclusion.(p4)


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To show that your debt was canceled in a bankruptcy case and is excluded from income, attach Form 982 to your federal income tax return and check the box on line 1a. Lines 1b through 1f do not apply to a cancellation that occurs in a title 11 bankruptcy case. Enter the total amount of debt canceled in your title 11 bankruptcy case on line 2. You must also reduce your tax attributes in Part II of Form 982 as explained under Reduction of Tax Attributes, later.
taxmap/pubs/p4681-002.htm#en_us_publink100080242

Insolvency(p4)


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Insolvency

Do not include a canceled debt in income to the extent that you were insolvent immediately before the cancellation. You were insolvent immediately before the cancellation to the extent that the total of all of your liabilities exceeded the FMV of all of your assets immediately before the cancellation. For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets which are beyond the reach of your creditors under the law, such as your interest in a pension plan and the value of your retirement account). Liabilities include:
Deposit
You can use the worksheet on page 6 to help calculate the extent that you were insolvent immediately before the cancellation.
Note.This exclusion does not apply to a cancellation that occurs in a title 11 bankruptcy case. This exclusion also does not apply if the debt is qualified principal residence indebtedness (defined in this section under Qualified Principal Residence Indebtedness, later) unless you elect to apply the insolvency exclusion instead of the qualified principal residence indebtedness exclusion.
taxmap/pubs/p4681-002.htm#en_us_publink100080244

How to report the insolvency exclusion.(p4)


rule
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To show that you were insolvent and that you are excluding canceled debt from income to the extent you were insolvent immediately before the cancellation, attach Form 982 to your federal income tax return and check the box on line 1b. On line 2, include the smaller of the amount of the debt canceled or the amount by which you were insolvent immediately before the cancellation. You can use the worksheet on page 6 to help calculate the extent that you were insolvent immediately before the cancellation. You must also reduce your tax attributes in Part II of Form 982 as explained under Reduction of Tax Attributes, later.
taxmap/pubs/p4681-002.htm#en_us_publink100080245

Example 1.(p5)

In 2008, Greg was released from his obligation to pay his personal credit card debt in the amount of $5,000. Greg received a 2008 Form 1099-C from his credit card lender showing canceled debt of $5,000 in box 2. Greg uses the insolvency worksheet to determine that his total liabilities immediately before the cancellation were $15,000 and the FMV of his total assets immediately before the cancellation was $7,000. This means that immediately before the cancellation, Greg was insolvent to the extent of $8,000 ($15,000 total liabilities minus $7,000 FMV of his total assets). Because the amount by which Greg was insolvent immediately before the cancellation exceeds the amount of his debt canceled, Greg can exclude the entire $5,000 canceled debt from income.
When completing his tax return, Greg checks the box on line 1b of Form 982 and enters $5,000 on line 2. Greg completes Part II to reduce his tax attributes as explained under Reduction of Tax Attributes, later. Greg does not include any of the $5,000 canceled debt on line 21 of his Form 1040. None of the canceled debt is included in his income.
taxmap/pubs/p4681-002.htm#en_us_publink100080246

Example 2.(p5)

Assume the same facts as in Example 1 except that Greg's total liabilities immediately before the cancellation were $10,000 and the FMV of his total assets immediately before the cancellation was $7,000. In this case, Greg is insolvent to the extent of $3,000 ($10,000 total liabilities minus $7,000 FMV of his total assets) immediately before the cancellation. Because the amount of the canceled debt exceeds the amount by which Greg was insolvent immediately before the cancellation, Greg can exclude only $3,000 of the $5,000 canceled debt from income under the insolvency exclusion.
Greg checks the box on line 1b of Form 982 and includes $3,000 on line 2. Also, Greg completes Part II to reduce his tax attributes as explained under Reduction of Tax Attributes, later. Additionally, Greg must include $2,000 of canceled debt on line 21 of his Form 1040 (unless another exception or exclusion applies).
taxmap/pubs/p4681-002.htm#en_us_publink100080247

Qualified Farm Indebtedness(p5)


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previous topic occurrence Qualified Farm Indebtedness next topic occurrence

You can exclude canceled farm debt from income if all of the following apply. For the definition of the term "related person," see Related persons under At-Risk Amounts in Publication 925, Passive Activity and At-Risk Rules.
Note.This exclusion does not apply to a cancellation of debt in a title 11 bankruptcy case or to the extent you were insolvent immediately before the cancellation. If qualified farm debt is canceled in a title 11 case, you must apply the bankruptcy exclusion rather than the exclusion for canceled qualified farm debt. If you were insolvent immediately before the cancellation of qualified farm debt, you must apply the insolvency exclusion before applying the exclusion for canceled qualified farm debt.
taxmap/pubs/p4681-002.htm#en_us_publink100080249

Exclusion limit.(p5)


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The amount of canceled qualified farm debt that you can exclude from income is limited. It cannot exceed the sum of your adjusted tax attributes and the total adjusted bases of qualified property you held at the beginning of 2009. For purposes of determining the limit on the exclusion for canceled qualified farm debt, the adjusted basis of any qualified property and adjusted tax attributes are determined after any reduction of tax attributes required because of the application of the insolvency exclusion for canceled debt.
taxmap/pubs/p4681-002.htm#en_us_publink100080250

Adjusted tax attributes.(p5)
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Adjusted tax attributes means the sum of the following items.
  1. Any net operating loss (NOL) for 2008 and any NOL carryover to 2008.
  2. Any net capital loss for 2008 and any capital loss carryover to 2008 under Internal Revenue Code section 1212.
  3. Any passive activity loss carryover from 2008.
  4. Three times the sum of any:
    1. General business credit carryover to or from 2008,
    2. Minimum tax credit available as of the beginning of 2009,
    3. Foreign tax credit carryover to or from 2008, and
    4. Passive activity credit carryover from 2008.
taxmap/pubs/p4681-002.htm#en_us_publink100080251

Qualified property.(p5)
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This is any property you use or hold for use in your trade or business or for the production of income.
taxmap/pubs/p4681-002.htm#en_us_publink100080252

How to report the qualified farm indebtedness exclusion.(p5)


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To show that all or part of your canceled debt is excluded from income because it is qualified farm debt, attach Form 982 to your federal income tax return and check the box on line 1c. On line 2 of Form 982, include the amount of qualified farm debt canceled, but not more than the amount of the exclusion limit (explained earlier). You must also reduce your tax attributes in Part II of Form 982 as explained under Reduction of Tax Attributes, later.
taxmap/pubs/p4681-002.htm#en_us_publink100080253

Example 1.(p5)

In 2008, Chuck was released from his obligation to pay a $10,000 debt that was incurred directly in connection with his trade or business of farming. Chuck received a Form 1099-C from the qualified lender showing canceled debt of $10,000 in box 2. For the 2005, 2006, and 2007 tax years, at least 50% of Chuck's total gross receipts were from the trade or business of farming. Chuck's adjusted tax attributes are $5,000 and Chuck has $3,000 total adjusted bases in qualified property at the beginning of 2009. Chuck had no other debt canceled during 2008 and he does not fall into any other exception or exclusion relating to canceled debt income.
Chuck can exclude $8,000 ($5,000 of adjusted tax attributes plus $3,000 total adjusted bases in qualified property at the beginning of 2009) of the $10,000 canceled debt from income. Chuck checks the box on line 1c of Form 982 and enters $8,000 on line 2. Also, Chuck completes Part II to reduce his tax attributes as explained under Reduction of Tax Attributes, later. The remaining $2,000 of canceled qualified farm debt is included in Chuck's income on Schedule F, line 10.
taxmap/pubs/p4681-002.htm#en_us_publink100080254

Example 2.(p5)

On March 1, 2008, Bob was released from his obligation to pay a $10,000 business credit card debt that was used directly in connection with his farming business. For the 2005, 2006, and 2007 tax years at least 50% of Bob's total gross receipts were from the trade or business of farming. Bob received a 2008 Form 1099-C from the qualified lender showing canceled debt of $10,000 in box 2. The FMV of Bob's total assets on March 1, 2008, (immediately before the cancellation of the credit card debt) was $7,000 and Bob's total liabilities at that time were $11,000. Bob's adjusted tax attributes (a 2008 NOL) are $7,000 and Bob has $4,000 total adjusted bases in qualified property at the beginning of 2009.
Bob qualifies to exclude $4,000 of the canceled debt under the insolvency exclusion because he is insolvent to the extent of $4,000 immediately before the cancellation ($11,000 total liabilities minus $7,000 FMV of total assets). Bob also qualifies to exclude the remaining $6,000 of canceled qualified farm debt. The limit on Bob's exclusion from income of canceled qualified farm debt is $7,000, the sum of his adjusted tax attributes of $3,000 (determined after taking into account the reduction of tax attributes required because of the exclusion of $4,000 of the canceled debt from Bob's income under the insolvency exclusion) plus $4,000 (Bob's total adjusted bases in qualified property at the beginning of 2009).
Bob checks the boxes on lines 1b and 1c of Form 982 and enters $10,000 on line 2. Bob completes Part II to reduce his tax attributes as explained under Reduction of Tax Attributes, later. Bob must reduce his tax attributes under the insolvency rules before applying the rules for qualified farm debt. Bob does not include any of his canceled debt in income.
taxmap/pubs/p4681-002.htm#en_us_publink100080255

Example 3.(p5)

Assume the same facts as in Example 2 except that immediately before the cancellation Bob was insolvent to the extent of the full $10,000 canceled debt. Because the exclusion for qualified farm debt does not apply to the extent that you were insolvent immediately before the cancellation, Bob checks only the box on line 1b of Form 982 and enters $10,000 on line 2. Bob completes Part II to reduce his tax attributes based on the insolvency exclusion as explained under Reduction of Tax Attributes, later. Bob does not include any of the canceled debt in income.
taxmap/pubs/p4681-002.htm#en_us_publink100080256

Qualified Real Property Business Indebtedness(p7)


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previous topic occurrence Qualified Real Property Business Indebtedness next topic occurrence

You can elect to exclude canceled qualified real property business indebtedness from income. Qualified real property business indebtedness is debt (other than qualified farm debt) that meets all of the following conditions.
  1. It was incurred or assumed in connection with real property used in a trade or business.
  2. It is secured by such real property.
  3. It was incurred or assumed at either of the following times.
    1. Before 1993.
    2. After 1992, if the debt is either (i) qualified acquisition indebtedness (defined below), or (ii) debt incurred to refinance qualified real property business debt incurred or assumed before 1993 (but only to the extent the amount of such debt does not exceed the amount of debt being refinanced).
  4. It is debt to which you elect to apply these rules.
taxmap/pubs/p4681-002.htm#w00000
Pencil

Insolvency Worksheet

Date debt was canceled (mm/dd/yy) 
Part I. Total liabilities immediately before the cancellation (do not include the same liability in more than one category)
Liabilities (debts)Amount Owed
Immediately Before the
Cancellation
1.Credit card debt$
2.Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $
3.Car and other vehicle loans$
4.Medical bills$
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)$
9.Accrued or past-due child care costs$
10.Federal or state income taxes remaining due (for prior tax years)$
11.Loans from 401(k) accounts and other retirement plans$
12.Loans against life insurance policies$
13.Judgments$
14.Business debts (including those owed as a sole proprietor or partner)$
15.Margin debt on stocks and other debt to purchase or secured by investment assets other than real property$
16.Other liabilities (debts) not included above$
17.Total liabilities immediately before the cancellation. Add lines 1 through 16.$
Part II. Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category)
AssetsFMV Immediately Before
the Cancellation
18.Cash and bank account balances$
19.Residences (including the value of land) (can be personal residence, any additional residence, or property held for investment or used in a trade or business) $
20.Cars and other vehicles$
21.Computers$
22.Household goods and furnishings (for example, appliances, electronics, furniture, etc.)$
23.Tools$
24.Jewelry$
25.Clothing$
26.Books$
27.Stocks and bonds$
28.Investments in coins, stamps, paintings, or other collectibles$
29.Firearms, sports, photographic, and other hobby equipment$
30.Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts)$
31.Interest in a pension plan$
32.Interest in education accounts$
33.Cash value of life insurance$
34.Security deposits with landlords, utilities, and others$
35.Interests in partnerships$
36.Value of investment in a business$
37.Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interest in hedge funds, and options) $
38.Other assets not included above$
39.FMV of total assets immediately before the cancellation. Add lines 18 through 38.$
Part III. Insolvency
40.Amount of Insolvency. Subtract line 39 from line 17. If zero or less, you are not insolvent. $
taxmap/pubs/p4681-002.htm#en_us_publink100080257

Qualified acquisition indebtedness.(p7)


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Qualified acquisition indebtedness is:
Note.This exclusion does not apply to a cancellation of debt in a title 11 bankruptcy case or to the extent you were insolvent immediately before the cancellation. If qualified real property business debt is canceled in a title 11 case, you must apply the bankruptcy exclusion rather than the exclusion for canceled qualified real property business debt. If you were insolvent immediately before the cancellation of qualified real property business debt, you must apply the insolvency exclusion before applying the exclusion for canceled qualified real property business debt.
taxmap/pubs/p4681-002.htm#en_us_publink100080259

Exclusion limit.(p7)


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The amount of canceled qualified real property business debt that you can exclude from income is limited. If you excluded canceled debt from income under the insolvency exclusion, you must reduce your tax attributes to account for the amount of the canceled debt excluded under the insolvency exclusion before determining your limit on the exclusion of canceled qualified real property business debt. Your exclusion for canceled qualified real property business debt is limited to the excess (if any) of:
In addition to this limit, the amount of canceled qualified real property business debt that can be excluded from income cannot exceed the total adjusted bases (determined after any attribute reductions under Internal Revenue Code sections 108(b) and (g)) of depreciable real property you held immediately before the cancellation (other than depreciable real property acquired in contemplation of the cancellation).
taxmap/pubs/p4681-002.htm#en_us_publink100080260

How to elect the qualified real property business debt exclusion.(p7)


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You must make an election to exclude canceled qualified real property business debt. The election must be made on a timely-filed (including extensions) federal income tax return for 2008 and can be revoked only with the consent of the IRS. The election is made by completing Form 982 in accordance with its instructions. Attach Form 982 to your federal income tax return for 2008 and check the box on line 1d. Include the amount of canceled qualified real property business debt (but not more than the amount of the exclusion limit, explained above) on line 2 of Form 982. You must also reduce your tax attributes in Part II of Form 982 as explained under Reduction of Tax Attributes, later.
If you timely filed your tax return without making this election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Enter "Filed pursuant to section 301.9100-2" on the amended return and file it at the same place you filed the original return.
taxmap/pubs/p4681-002.htm#en_us_publink100080261

Example.(p7)

In 2003, Curt purchased a retail store for use in a business he operated as a sole proprietorship. Curt made a $20,000 down payment and financed the remaining $200,000 of the purchase price with a bank loan. The bank loan was a recourse loan and was secured by the property. Curt used the property in his business continuously since its acquisition. Curt had no other debt secured by that depreciable real property. In addition to the retail store, Curt owned depreciable equipment and furniture with an adjusted basis of $50,000.
Curt's business encountered financial difficulties in 2008. On September 25, 2008, the bank financing the retail store loan entered into a workout agreement with Curt under which it canceled $20,000 of the debt. Immediately before the cancellation, the outstanding principal balance on the retail store loan was $185,000, the FMV of the store was $165,000, and the adjusted basis was $210,000 ($220,000 cost minus $10,000 accumulated depreciation).
The bank sent Curt a 2008 Form 1099-C showing canceled debt of $20,000 in box 2. Curt had no tax attributes other than basis to reduce and did not qualify for any exception or exclusion other than the qualified real property business indebtedness exclusion.
Curt elects to apply the qualified real property business debt exclusion provisions to the canceled debt. The amount of canceled qualified real property business debt that Curt can exclude from income is limited to $20,000 (the excess of the $185,000 outstanding principal amount of his qualified real property business debt immediately before the cancellation over the $165,000 FMV of the business real property securing such debt). Curt's exclusion of canceled qualified real property business debt is also subject to a $210,000 limit equal to the adjusted basis of depreciable real property he held immediately before the cancellation.
Thus, Curt can exclude the entire $20,000 of canceled qualified real property business debt from income. Curt checks the box on line 1d of Form 982 and enters $20,000 on line 2. Curt must also use line 4 of Form 982 to reduce his basis in depreciable real property by the $20,000 of canceled qualified real property business debt excluded from his income as explained under Reduction of Tax Attributes, later.
taxmap/pubs/p4681-002.htm#en_us_publink100080262

Qualified Principal Residence Indebtedness(p7)


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previous topic occurrence Qualified Principal Residence Indebtedness next topic occurrence

You can exclude canceled debt from income if it is qualified principal residence indebtedness. Qualified principal residence indebtedness is any debt incurred in acquiring, constructing, or substantially improving your principal residence and which is secured by your principal residence. Qualified principal residence indebtedness also includes any debt secured by your principal residence resulting from the refinancing of debt incurred to acquire, construct, or substantially improve your principal residence but only to the extent the amount of debt does not exceed the amount of the refinanced debt.
taxmap/pubs/p4681-002.htm#en_us_publink100080263

Example.(p7)

In 2002, Becky purchased a principal residence for $315,000. Becky took out a $300,000 mortgage loan to buy the principal residence and made a down payment of $15,000. The loan was secured by the principal residence. In 2003, Becky took out a second mortgage loan in the amount of $50,000 that she used to add a garage to her home.
In 2008, when the outstanding principal of her first and second mortgage loans was $325,000, Becky refinanced the two loans into one loan in the amount of $400,000. The FMV of the principal residence at the time of the refinancing was $430,000. Becky used the additional $75,000 debt ($400,000 new mortgage loan minus $325,000 outstanding principal balances of Becky's first and second mortgage loans immediately before the refinancing) to pay off personal credit cards and to pay college tuition for her daughter.
After the refinancing, Becky's qualified principal residence indebtedness is $325,000 because the debt resulting from the refinancing is qualified principal residence indebtedness only to the extent the amount of debt does not exceed the amount of the refinanced debt.
taxmap/pubs/p4681-002.htm#en_us_publink100080264

Principal residence.(p7)


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Your principal residence is the home where you ordinarily live most of the time. You can have only one principal residence at any one time.
Note.This exclusion does not apply to a cancellation of debt in a title 11 bankruptcy case. If qualified principal residence indebtedness is canceled in a title 11 bankruptcy case, you must apply the bankruptcy exclusion rather than the exclusion for qualified principal residence indebtedness. If you were insolvent immediately before the cancellation, you can elect to apply the insolvency exclusion (as explained under Insolvency, earlier) instead of applying the qualified principal residence indebtedness exclusion. To do this, check the box on line 1b of Form 982 instead of the box on line 1e.
taxmap/pubs/p4681-002.htm#en_us_publink100080266

Exclusion limit.(p8)


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The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately). You cannot exclude canceled qualified principal residence indebtedness from income if the cancellation was for services performed for the lender or on account of any other factor not directly related to a decline in the value of your residence or to your financial condition.
taxmap/pubs/p4681-002.htm#en_us_publink100080267

Ordering rule.(p8)


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If only a part of a loan is qualified principal residence indebtedness, the exclusion from income for canceled qualified principal residence indebtedness applies only to the extent the amount canceled exceeds the amount of the loan (immediately before the cancellation) that is not qualified principal residence indebtedness. The remaining part of the loan may qualify for another exclusion.
taxmap/pubs/p4681-002.htm#en_us_publink100080268

Example.(p8)

Ken incurred recourse debt of $800,000 when he purchased his principal residence for $880,000. When the FMV of the property was $1,000,000, Ken refinanced the debt for $850,000. At the time of the refinancing, the principal balance of the original mortgage loan was $740,000. Ken used the $110,000 he obtained from the refinancing ($850,000 minus $740,000) to pay off his credit cards and to buy a new car.
About 2 years after the refinancing, Ken lost his job and was unable to get another position paying a comparable salary. Ken's residence had declined in value to between $700,000 and $750,000. Based on Ken's circumstances, the lender agreed to allow a short sale of the property for $735,000 and to cancel the remaining $115,000 of the $850,000 debt. Under the ordering rule, Ken can exclude only $5,000 of the canceled debt from his income under the exclusion for canceled qualified principal residence indebtedness ($115,000 canceled debt minus the $110,000 amount of the debt that was not qualified principal residence indebtedness). Ken must include the remaining $110,000 of canceled debt in income on line 21 of his Form 1040 (unless another exception or exclusion applies).
taxmap/pubs/p4681-002.htm#en_us_publink100080269

How to report the qualified principal residence indebtedness exclusion.(p8)


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To show that all or part of your canceled debt is excluded from income because it is qualified principal residence indebtedness, attach Form 982 to your federal income tax return and check the box on line 1e. On line 2 of Form 982, include the amount of canceled qualified principal residence indebtedness, but not more than the amount of the exclusion limit (explained earlier). If you continue to own your residence after a cancellation of qualified principal residence indebtedness, you must reduce your basis in the residence as explained under Reduction of Tax Attributes, later.
taxmap/pubs/p4681-002.htm#en_us_publink100087390

Qualified Midwestern Disaster Area Indebtedness(p8)


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Qualified Midwestern Disaster Area Indebtedness

You can exclude nonbusiness debt that is canceled if the debt is canceled by an applicable entity and you are a qualified individual. This exclusion only applies to cancellations made on or after the applicable disaster date and before 2010, and does not apply to debt secured by real property located outside of the Midwestern disaster area.
taxmap/pubs/p4681-002.htm#en_us_publink100087814

Nonbusiness debt.(p8)
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A nonbusiness debt is any debt other than debt incurred in connection with a trade or business.
taxmap/pubs/p4681-002.htm#en_us_publink100087806

Applicable entity.(p8)
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An applicable entity includes:
  1. A financial institution described in section 581 or 591(a) (such as a domestic bank, trust company, building and loan or savings and loan association).
  2. A credit union.
  3. A federal government agency including a department, an agency, a court or court administrative office, or an instrumentality in the executive, judicial, or legislative branch of the government, including government corporations.
  4. Any of the following, its successor, or subunit of one of the following:
    1. Federal Deposit Insurance Corporation,
    2. Resolution Trust Corporation,
    3. National Credit Union Administration,
    4. Any military department,
    5. U.S. Postal Service, or
    6. Postal Rate Commission.
  5. Certain subsidiaries of a financial institution or credit union.
  6. Any organization whose significant trade or business is the lending of money, such as a finance company or credit card company (whether or not affiliated with a financial institution).
Deposit
An entity that is required to file Form 1099-C, Cancellation of Debt, is an applicable entity.
taxmap/pubs/p4681-002.htm#en_us_publink1000154130

Qualified individual.(p8)
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To be a qualified individual, you must be an individual whose principal residence on the applicable disaster date was located in:
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Applicable disaster date.(p8)
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This is the date on which the severe storms, tornados, or flooding occurred in any of the states of Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, and Wisconsin that gave rise to the declaration of a major disaster by the President during the period beginning on May 20, 2008, and ending on July 31, 2008.
Deposit
See Publication 4492-B for more information on tax benefits available for taxpayers affected by the Midwestern storms, tornados, or flooding.
taxmap/pubs/p4681-002.htm#en_us_publink100087816

How to report the qualified Midwestern disaster area indebtedness exclusion.(p8)


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To show that all or part of your canceled debt is excluded from income because it is qualified Midwestern disaster area indebtedness, attach Form 982 to your federal income tax return and check the box on line 1f. On line 2 of Form 982, include the amount of qualified Midwestern disaster area debt canceled. You must also reduce your tax attributes in Part II of Form 982 as explained under Reduction of Tax Attributes, later.
taxmap/pubs/p4681-002.htm#en_us_publink100087817

Example.(p8)

Michelle's principal residence was located in Page, Iowa, on May 28, 2008. On June 15, 2008, Michelle was released from her obligation to pay her $5,000 personal automobile debt. Michelle received a 2008 Form 1099-C from her automobile lender (a credit union) showing canceled debt of $5,000 in box 2. Michelle had no other debt canceled in 2008 and does not fall into any other exception or exclusion relating to canceled debt income.
Michelle can exclude the entire $5,000 of canceled debt from income because it was nonbusiness debt discharged by an applicable entity and Michelle is a qualified individual (because her principal residence was located in a Midwestern disaster area listed in Table 1 of Publication 4492-B). Also, the cancellation was made on or after the applicable disaster date (May 28, 2008) and before 2010.
Michelle checks the box on line 1f of Form 982 and enters $5,000 on line 2. Michelle also completes Part II to reduce her tax attributes as explained under Reduction of Tax Attributes, below.
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