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previous page Previous Page: Publication 4681 - Canceled Debts, Foreclosures, Repossessions, and Abandonments (For Individuals) - Exclusions
next page Next Page: Publication 4681 - Canceled Debts, Foreclosures, Repossessions, and Abandonments (For Individuals) - Foreclosures and Repossessions
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication
taxmap/pubs/p4681-003.htm#en_us_publink100080270

Reduction of Tax Attributes(p8)


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If you exclude canceled debt from income, you must reduce certain tax attributes (but not below zero) by the amount excluded. Use Part II of Form 982 to reduce your tax attributes. The order in which the tax attributes are reduced depends on the reason the canceled debt was excluded from income. If the total amount of canceled debt excluded from income (line 2 of Form 982) was more than your total tax attributes, the total reduction of tax attributes in Part II of Form 982 will be less than the amount on  
line 2.
taxmap/pubs/p4681-003.htm#en_us_publink100080271

Qualified Principal Residence Indebtedness(p9)


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If you exclude the canceled qualified principal residence indebtedness from income and you continue to own the residence after the cancellation, you must reduce the basis of the residence (but not below zero) by the amount of the canceled qualified principal residence indebtedness excluded from income. Enter the amount of the basis reduction on line 10b of Form 982.
For more details on determining the basis of your principal residence, see Publication 523, Selling Your Home.
taxmap/pubs/p4681-003.htm#en_us_publink100080272

Bankruptcy, Insolvency, and Qualified Midwestern Disaster Area Indebtedness(p9)


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Bankruptcy, Insolvency, and Qualified Midwestern Disaster Area Indebtedness

taxmap/pubs/p4681-003.htm#en_us_publink100080273

No tax attributes other than basis of personal use property.(p9)


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If the canceled debt you are excluding is a debt other than qualified principal residence indebtedness (such as a car loan or credit card debt) and you have no tax attributes other than the adjusted bases of personal use property you own (see the list of seven tax attributes, later), you must reduce the bases of the personal use property you held at the beginning of 2009 (in proportion to adjusted basis). Personal use property is any property that is not used in your trade or business nor held for investment (such as your home furnishings, vehicle, and residence). Include on line 10a of Form 982 the smallest of:
taxmap/pubs/p4681-003.htm#en_us_publink100080274

Example.(p9)

In 2005, Kyra bought a car for personal use. The cost of the car was $12,000. Kyra put down $2,000 and took out a loan of $10,000 to help with the purchase. The loan was a recourse loan, meaning that Kyra was personally liable for the full amount of the debt.
On December 7, 2008, when the balance of the loan was $8,500, Kyra was unable to make payments and the lender repossessed the car. The car had an FMV of $7,000 at the time of repossession. At the time of the repossession, the lender forgave the remaining $1,500 balance due on the car loan ($8,500 outstanding balance immediately before the repossession minus $7,000 FMV).
Kyra's only other assets at the time of the cancellation are the furniture in her apartment which has a cost basis of $5,000 and a FMV of $3,000, jewelry with a basis of $500 and a FMV of $1,000, and a $600 balance in her savings account. Thus, the FMV of Kyra's total assets immediately before the cancellation was $11,600 ($7,000 car plus $3,000 furniture plus $1,000 jewelry plus $600 savings). Kyra also had an outstanding student loan balance of $6,000 immediately before the cancellation, bringing her total liabilities at that time to $14,500 ($8,500 balance on car loan plus $6,000 student loan balance). Other than the car, which was repossessed, Kyra held all of these assets at the beginning of 2009. The FMV and bases of the assets remained the same at the beginning of 2009.
Kyra received a 2008 Form 1099-C showing $1,500 in box 2 (amount of debt canceled) and $7,000 in box 7 (FMV of the property). Kyra can exclude all of $1,500 canceled debt from income because at the time of the cancellation, she was insolvent to the extent of $2,900 ($14,500 of total liabilities immediately before the cancellation minus $11,600 FMV of total assets at that time).
Kyra checks box 1b on Form 982 and enters $1,500 on line 2. Kyra enters $100 on line 10a (the smallest of: (a) the $5,500 bases of Kyra's personal use property held at the beginning of 2009 ($5,000 furniture plus $500 jewelry), (b) the $1,500 amount of nonbusiness debt she is excluding from income on line 2 of Form 982, or (c) the $100 excess of the total bases of the property and the amount of money Kyra held immediately after the cancellation over Kyra's total liabilities at that time ($5,500 bases of property held immediately after the cancellation plus $600 savings minus $6,000 student loan).
Kyra must reduce her bases in her property in proportion to her adjusted bases in the property. Thus, Kyra reduces her basis in the furniture by $91 ($100 x 5,000/5,500) and her basis in the jewelry by $9 ($100 x 500/5,500).
taxmap/pubs/p4681-003.htm#en_us_publink100080275

All other tax attributes.(p9)


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If the canceled debt is excluded by reason of the bankruptcy, insolvency, or qualified Midwestern disaster area indebtedness exclusions, you must use the excluded debt to reduce the following tax attributes (but not below zero) in the order listed unless you elect to reduce the basis of depreciable property first, as explained later. The reduction of tax attributes must be made after figuring your income tax liability for 2008.
  1. Net operating loss (NOL). First reduce any 2008 NOL and then reduce any NOL carryover to 2008 (after taking into account any amount used to reduce 2008 taxable income) in the order of the tax years from which the carryovers arose, starting with the earliest year. Reduce the NOL or carryover by one dollar for each dollar of excluded canceled debt.
  2. General business credit carryover. Reduce the credit carryover to or from 2008. Reduce the credit carryovers to 2008 in the order in which they are taken into account for 2008. Reduce the carryover by 331/3 cents for each dollar of excluded canceled debt.
  3. Minimum tax credit. Reduce the minimum tax credit available at the beginning of 2009. Reduce the credit by 331/3 cents for each dollar of excluded canceled debt.
  4. Capital loss. First reduce any 2008 net capital loss and then any capital loss carryover to 2008. Reduce the capital loss or carryover by one dollar for each dollar of excluded canceled debt.
  5. Basis. Reduce the bases of the property you hold at the beginning of 2009 in the following order (and within each category, in proportion to adjusted basis).
    1. Real property (except inventory) used in your trade or business or held for investment that secured the canceled debt.
    2. Personal property (except inventory and accounts and notes receivable) used in your trade or business or held for investment that secured the canceled debt.
    3. Other property (except inventory, accounts and notes receivable, and real property held primarily for sale to customers) used in your trade or business or held for investment.
    4. Inventory, accounts and notes receivable, and real property held primarily for sale to customers.
    5. Personal use property (property not used in your trade or business nor held for investment).
    Reduce the basis by one dollar for each dollar of excluded canceled debt. However, the reduction cannot be more than the excess of the total bases of the property and the amount of money you held immediately after the debt cancellation over your total liabilities immediately after the cancellation.
    For allocation rules that apply to basis reductions for multiple canceled debts, see Regulations section 1.1017-1(b)(2). Also see Election to reduce the basis of depreciable property before reducing other tax attributes, later.
  6. Passive activity loss and credit carryovers. Reduce the passive activity loss and credit carryovers from 2008. Reduce the loss carryover by one dollar for each dollar of excluded canceled debt. Reduce the credit carryover by 331/3 cents for each dollar of excluded canceled debt.
  7. Foreign tax credit. Reduce the credit carryover to or from 2008. Reduce the credit carryovers to 2008 in the order in which they are taken into account for 2008. Reduce the carryover by 331/3 cents for each dollar of excluded canceled debt.
taxmap/pubs/p4681-003.htm#en_us_publink100080276

Election to reduce the basis of depreciable property before reducing other tax attributes.(p9)


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You can elect to apply any portion of the tax attribute reduction required because of the exclusion of canceled debt to the reduction under section 1017 of the bases of depreciable property you held at the beginning of 2009. Basis of property is reduced in the following order:
  1. Depreciable real property used in your trade or business or held for investment that secured the canceled debt.
  2. Depreciable personal property used in your trade or business or held for investment that secured the canceled debt.
  3. Other depreciable property used in your trade or business or held for investment.
  4. Real property held primarily for sale to customers if you elect to treat it as if it were depreciable property on Form 982.
Basis reduction is limited to the total adjusted bases of all your depreciable property. Depreciable property for this purpose means any property subject to depreciation or amortization, but only if a reduction of basis will reduce the depreciation or amortization otherwise allowable for the period immediately following the basis reduction. If the amount of canceled debt excluded from income is more than the total bases in depreciable property, the excess is applied to reduce the other tax benefits in accordance with the general ordering rules for reduction of tax attributes described earlier under All other tax attributes. In figuring the limit on the basis reduction in (5), Basis, use the remaining adjusted bases of your properties after making this election. See Form 982 for information on how to make this election. The election can be revoked only with the consent of the IRS.
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Recapture of basis reductions.(p10)


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If you reduce the basis of property under these provisions and later sell or otherwise dispose of the property at a gain, the part of the gain due to this basis reduction is taxable as ordinary income under the depreciation recapture provisions. Treat any property that is not section 1245 or section 1250 property as section 1245 property. For section 1250 property, determine the depreciation adjustments that would have resulted under the straight line method as if there were no basis reduction for debt cancellation. See Publication 535, Business Expenses, or Publication 225, Farmer's Tax Guide, for more details on sections 1245 and 1250 property and the recapture of gain as ordinary income.
taxmap/pubs/p4681-003.htm#en_us_publink100080278

Qualified Farm Indebtedness(p10)


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If you exclude canceled debt from income under both the insolvency exclusion and the exclusion for qualified farm indebtedness, you must reduce your tax attributes by the amount excluded under the insolvency exclusion before applying the exclusion for canceled qualified farm indebtedness. You must then reduce your remaining tax attributes (but not below zero) by the amount of canceled debt that qualifies for the farm debt exclusion.
Generally, when reducing your tax attributes for canceled qualified farm indebtedness excluded from income, you must follow the ordering rules for reduction of tax attributes, previously explained under Bankruptcy, Insolvency, and Qualified Midwestern Disaster Area Indebtedness. However, do not follow the rules in item (5), Basis. Instead, only reduce the basis of qualified property. Qualified property is any property you use or hold for use in your trade or business or for the production of income. Reduce the basis of qualified property in the following order.
  1. Depreciable qualified property. You can elect on Form 982 to treat real property held primarily for sale to customers as if it were depreciable property.
  2. Land that is qualified property and is used or held for use in your farming business.
  3. Other qualified property.
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Qualified Real Property Business Indebtedness(p10)


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If you make an election to exclude canceled qualified real property business debt from income, you must reduce the basis of your depreciable real property (but not below zero) by the amount of canceled qualified real property business debt excluded from income. The basis reduction is made at the beginning of 2009. However, if you dispose of your depreciable real property before the beginning of 2009, you must reduce the basis of the depreciable real property (but not below zero) immediately before the disposition. Enter the amount of the basis reduction on line 4 of Form 982.
taxmap/pubs/p4681-003.htm#en_us_publink100080280

Example 1.(p10)

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 tax attributes included the basis of depreciable property, a net operating loss, and a capital loss carryover to 2008.
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 principal amount of the debt. Immediately before the bank entered into the workout agreement, Curt was insolvent to the extent of $12,000. At that time, the outstanding principal balance on the retail store loan was $185,000, the FMV of the store was $165,000, and the adjusted basis was $210,000 ($220,000 cost minus $10,000 accumulated depreciation). The bank sent Curt a 2008 Form 1099-C showing canceled debt of $20,000 in box 2.
Curt must apply the insolvency exclusion before applying the exclusion for canceled qualified real property business indebtedness. Under the insolvency exclusion rules, Curt can exclude $12,000 of the canceled debt from income. Curt elects to reduce his basis of depreciable property before reducing other tax attributes. Under that election, Curt must first reduce his basis in the depreciable real property used in his trade or business that secured the canceled debt. After the basis reduction, Curt's adjusted basis in the depreciable real property securing the canceled debt is $198,000 ($210,000 adjusted basis before entering into the workout agreement minus $12,000 of canceled debt excluded from income under the insolvency exclusion).
The exclusion for qualified real property business indebtedness is limited to $20,000, the excess of the outstanding principal amount of the qualified real property business indebtedness (immediately before the cancellation) over the FMV (immediately before the cancellation) of the real property securing such debt ($185,000 minus $165,000). Curt's exclusion is also limited to $198,000, the total adjusted bases (determined after reduction for the canceled debt excluded under the insolvency exclusion) of his depreciable real property he held immediately before the cancellation. Since both of these limits exceed the $8,000 of remaining canceled debt ($20,000 minus $12,000), Curt can exclude $8,000 under the qualified real property business indebtedness exclusion.
Curt checks the boxes on lines 1b and 1d of Form 982. He completes Part II of Form 982 to reduce his bases in the depreciable real property by $20,000, the amount of the canceled debt excluded from income. Curt enters $8,000 on line 4 and $12,000 on line 5.
taxmap/pubs/p4681-003.htm#en_us_publink100080281

Example 2.(p10)

Bob owns depreciable real property used in his retail business. His adjusted basis in the property is $145,000. The FMV of the property is $120,000. The property is subject to $134,000 of recourse debt which is secured by the property. Bob had no other debt secured by that depreciable real property. Bob also had a $15,000 NOL in 2008.
During 2008, Bob entered into a workout agreement with the lender under which the lender canceled $14,000 of the debt on the real property used in Bob's business. Immediately before the cancellation, Bob was insolvent to the extent of $10,000. Bob excludes $10,000 of the canceled debt from income under the insolvency exclusion. As a result of that exclusion, Bob reduced his NOL by $10,000.
If Bob elects to apply the qualified real property business indebtedness exclusion provisions to the canceled debt, he can exclude the remaining $4,000 of canceled debt from income under the exclusion for canceled qualified real property business indebtedness. The exclusion limit based on the excess of the outstanding principal amount of the qualified real property business debt (immediately before the cancellation) over the FMV (immediately before the cancellation) of the business real property securing such debt ($134,000 minus $120,000) and the exclusion limit that 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 property held immediately before the cancellation (at least $145,000) both exceed the remaining $4,000 of canceled debt.
Bob checks the boxes on lines 1b and 1d of Form 982 and enters $14,000 on line 2. Bob completes Part II of Form 982 to reduce his basis of depreciable real property and his 2008 NOL by entering $4,000 on line 4 and $10,000 on line 6. None of the canceled debt is included in Bob's income.
previous pagePrevious Page: Publication 4681 - Canceled Debts, Foreclosures, Repossessions, and Abandonments (For Individuals) - Exclusions
next pageNext Page: Publication 4681 - Canceled Debts, Foreclosures, Repossessions, and Abandonments (For Individuals) - Foreclosures and Repossessions
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication