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IRS.gov Website
Publication 4681
taxmap/pubs/p4681-002.htm#en_us_publink1000192027

Exclusions(p5)

rule
After you have applied any exceptions to the general rule that a canceled debt is included in your income, there are several reasons why you might still be able to exclude a canceled debt from your income. These exclusions are explained next. If a canceled debt is excluded from your income, it is nontaxable. In most cases, however, if you exclude canceled debt from income under one of these provisions, you must also reduce your tax attributes (certain credits, losses, and basis of assets) as explained later under Reduction of Tax Attributes.
EIC
Reacquisition of business debt. If you made an election under section 108(i) of the Internal Revenue Code 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 that income, for the tax year of the election or any later tax year, based on a title 11 bankruptcy case, insolvency, qualified farm indebtedness, or qualified real property business indebtedness. For more details, see section 108(i) of the Internal Revenue Code and Revenue Procedure 2009-37, 2009-36 I.R.B. 309, available at www.irs.gov/irb/2009-36_IRB/ar07.html.
taxmap/pubs/p4681-002.htm#en_us_publink1000192030

Bankruptcy(p5)

rule
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 (including all chapters in title 11 such as chapters 7, 11, and 13), 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_publink1000192031

How to report the bankruptcy exclusion.(p5)

rule
To show that your debt was canceled in a bankruptcy case and is excluded from income, attach Form 982 to your federal income tax return and check the box on line 1a. Lines 1b through 1e 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_publink1000192033

Insolvency(p5)

rule
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 was more than the FMV of all of your assets immediately before the cancellation. For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets which are beyond the reach of your creditors under the law, such as your interest in a pension plan and the value of your retirement account). Liabilities include:
Deposit
You can use the Insolvency Worksheet, found later in this publication, to help calculate the extent that you were insolvent immediately before the cancellation.
Note. This exclusion does not apply to a cancellation of debt that occurs in a title 11 bankruptcy case. It 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_publink1000192037

How to report the insolvency exclusion.(p5)

rule
To show that you are excluding canceled debt from income under the insolvency exclusion, attach Form 982 to your federal income tax return and check the box on line 1b. On line 2, include the smaller of the amount of the debt canceled or the amount by which you were insolvent immediately before the cancellation. You can use the Insolvency Worksheet, later, 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_publink1000192039

Example 1—amount of insolvency more than canceled debt.(p5)

In 2013, Greg was released from his obligation to pay his personal credit card debt in the amount of $5,000. Greg received a 2013 Form 1099-C from his credit card lender showing the entire amount of discharged debt of $5,000 in box 2. None of the exceptions to the general rule that canceled debt is included in income apply. 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 was more than 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_publink1000192041

Example 2—amount of insolvency less than canceled debt.(p6)

The facts are the same 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 was more than 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 exclusion applies).
taxmap/pubs/p4681-002.htm#en_us_publink1000192043

Example 3—joint debt and separate returns.(p6)

In 2013, James and his wife Robin were released from their obligation to pay a debt of $10,000 for which they were jointly and severally liable. None of the exceptions to the general rule that canceled debt is included in income apply. They incurred the debt (originally $12,000) to finance James's purchase of a $9,000 motorcycle and Robin's purchase of a laptop computer and software for personal use for $3,000. They each received a 2013 Form 1099-C from the bank showing the entire canceled debt of $10,000 in box 2. Based on the use of the loan proceeds, they agreed that James was responsible for 75% of the debt and Robin was responsible for the remaining 25%. Therefore, James's share of the debt is $7,500 (75% of $10,000), and Robin's share is $2,500 (25% of $10,000). By completing the insolvency worksheet, James determines that, immediately before the cancellation of the debt, he was insolvent to the extent of $5,000 ($15,000 total liabilities minus $10,000 FMV of his total assets). He can exclude $5,000 of his $7,500 canceled debt. Robin completes a separate insolvency worksheet and determines she was insolvent to the extent of $4,000 ($9,000 total liabilities minus $5,000 FMV of her total assets). She can exclude her entire canceled debt of $2,500.
When completing his separate tax return, James checks the box on line 1b of Form 982 and enters $5,000 on line 2. He completes Part II to reduce his tax attributes as explained under Reduction of Tax Attributes, later. He must include the remaining $2,500 ($7,500 − $5,000) of canceled debt on line 21 of his Form 1040 (unless another exclusion applies).
When completing her return, Robin checks the box on line 1b of Form 982 and enters $2,500 on line 2. She completes Part II to reduce her tax attributes as explained under Reduction of Tax Attributes, later. She does not include any of the canceled debt on line 21 of her Form 1040. None of the canceled debt has to be included in her income.
taxmap/pubs/p4681-002.htm#en_us_publink1000192046

Qualified Farm Indebtedness(p6)

rule
You can exclude canceled farm debt from income on your 2013 return 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_publink1000192048

Exclusion limit.(p6)

rule
The amount of canceled qualified farm debt you can exclude from income under this exclusion is limited. It cannot be more than the sum of: If you excluded canceled debt under the insolvency exclusion, the adjusted basis of any qualified property and adjusted tax attributes are determined after any reduction of tax attributes required under the insolvency exclusion.
Any canceled qualified farm debt that is more than this limit must be included in your income.
For more information about the basis of property, see Publication 551.
taxmap/pubs/p4681-002.htm#en_us_publink1000192049
Adjusted tax attributes.(p6)
Adjusted tax attributes means the sum of the following items.
  1. Any net operating loss (NOL) for 2013 and any NOL carryover to 2013.
  2. Any net capital loss for 2013 and any capital loss carryover to 2013.
  3. Any passive activity loss carryover from 2013.
  4. Three times the sum of any:
    1. General business credit carryover to or from 2013,
    2. Minimum tax credit available as of the beginning of 2014,
    3. Foreign tax credit carryover to or from 2013, and
    4. Passive activity credit carryover from 2013.
taxmap/pubs/p4681-002.htm#en_us_publink1000192050
Qualified property.(p6)
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_publink1000192051

How to report the qualified farm indebtedness exclusion.(p6)

rule
To show that all or part of your canceled debt is excluded from income because it is qualified farm debt, check the box on line 1c of Form 982 and attach it to your Form 1040. On line 2 of Form 982, include the amount of the qualified farm debt canceled, but not more than the exclusion limit (explained earlier). You must also reduce your tax attributes in Part II of Form 982 as explained under Reduction of Tax Attributes, later.
taxmap/pubs/p4681-002.htm#en_us_publink1000192053

Example 1.(p6)

In 2013, 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 discharged debt of $10,000 in box 2. For his 2010, 2011, and 2012 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 2014. Chuck had no other debt canceled during 2013 and no other exception or exclusion relating to canceled debt income applies.
Chuck can exclude $8,000 ($5,000 of adjusted tax attributes plus $3,000 total adjusted bases in qualified property at the beginning of 2014) 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 8.
taxmap/pubs/p4681-002.htm#en_us_publink1000192055

Example 2.(p6)

On March 1, 2013, 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 his 2010, 2011, and 2012 tax years, at least 50% of Bob's total gross receipts were from the trade or business of farming. Bob received a 2013 Form 1099-C from the qualified lender showing discharged debt of $10,000 in box 2. The FMV of Bob's total assets on March 1, 2013, (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 2013 NOL) are $7,000 and Bob has $4,000 total adjusted bases in qualified property at the beginning of 2014.
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 must reduce his tax attributes under the insolvency rules before applying the rules for qualified farm debt. 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 (the $7,000 NOL minus the $4,000 reduction of tax attributes required because of the $4,000 exclusion of canceled debt under the insolvency exclusion) plus $4,000 (Bob's total adjusted bases in qualified property at the beginning of 2014).
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 does not include any of his canceled debt in income.
taxmap/pubs/p4681-002.htm#en_us_publink1000192057

Example 3.(p7)

The facts are the same 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 Bob was insolvent immediately before the cancellation, he 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_publink1000192059

Qualified Real Property Business Indebtedness(p7)

rule
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 that real property.
  3. It was incurred or assumed:
    1. Before 1993, or
    2. After 1992, if the debt is either (i) qualified acquisition indebtedness (defined next), or (ii) debt incurred to refinance qualified real property business debt incurred or assumed before 1993 (but only to the extent the amount of such debt does not exceed the amount of debt being refinanced).
  4. It is debt to which you elect to apply these rules.
Deposit
Residential rental property generally qualifies as real property used in a trade or business unless you also use the dwelling as a home. For more information, see Dwelling Unit Used as a Home in Pub. 527.
taxmap/pubs/p4681-002.htm#en_us_publink1000192062

Definition of qualified acquisition indebtedness.(p7)

rule
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 bankruptcy case, you must apply the bankruptcy exclusion rather than the exclusion for canceled qualified real property business debt. If you were insolvent immediately before the cancellation of qualified real property business debt, you must apply the insolvency exclusion before applying the exclusion for canceled qualified real property business debt.
taxmap/pubs/p4681-002.htm#en_us_publink1000192064

Exclusion limit.(p7)

rule
The amount of canceled qualified real property business debt you can exclude from income under this exclusion is limited to the excess (if any) of:
In addition to this limit, a second overall limit applies. The amount of canceled qualified real property business debt you can exclude from income cannot be more than the total adjusted bases of depreciable real property you held immediately before the cancellation of the qualified real property business indebtedness (other than depreciable real property acquired in contemplation of the cancellation). When figuring this overall limit, use the adjusted basis of the depreciable real property after any reductions in basis required because of the exclusion of debt canceled under the bankruptcy, insolvency, or farm debt provisions described in this publication.
For more information about the basis of property, see Publication 551.
taxmap/pubs/p4681-002.htm#en_us_publink1000192065

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

rule
You must make an election to exclude canceled qualified real property business debt from gross income. The election must be made on a timely filed (including extensions) federal income tax return for 2013 and can be revoked only with IRS consent. The election is made by completing Form 982 in accordance with its instructions. Attach Form 982 to your federal income tax return for 2013 and check the box on line 1d. Include the amount of canceled qualified real property business debt (but not more than the amount of the exclusion limit, explained earlier) on line 2 of Form 982. You must also reduce your tax attributes in Part II of Form 982 as explained under Reduction of Tax Attributes, later.
If you timely filed your tax return without making this election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Enter "Filed pursuant to section 301.9100-2" on the amended return and file it at the same place you filed the original return.
taxmap/pubs/p4681-002.htm#en_us_publink1000192067

Example.(p7)

In 2007, Curt bought 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 he bought it. He 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 2013. On September 26, 2013, 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 him a 2013 Form 1099-C showing discharged 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 debt exclusion.
Curt elects to apply the qualified real property business debt exclusion to the canceled debt. The amount of canceled qualified real property business debt that he 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 the debt). Curt's exclusion is also subject to an overall $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_publink1000192069

Qualified Principal Residence Indebtedness(p7)

rule
You can exclude canceled debt from income if it is qualified principal residence indebtedness. Qualified principal residence indebtedness is any mortgage you took out to buy, build, or substantially improve your main home. It also must be secured by your main home. Qualified principal residence indebtedness also includes any debt secured by your main home that you used to refinance a mortgage you took out to buy, build, or substantially improve your main home, but only up to the amount of the old mortgage principal just before the refinancing.
taxmap/pubs/p4681-002.htm#en_us_publink1000192070

Example 1.(p7)

In 2007, Becky bought a main home for $315,000. She took out a $300,000 mortgage loan to buy the home and made a down payment of $15,000. The loan was secured by the home. In 2008, Becky took out a second mortgage loan in the amount of $50,000 that she used to add a garage to her home.
In 2013, 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 home at the time of the refinancing was $430,000. She used the additional $75,000 debt proceeds ($400,000 new mortgage loan minus $325,000 outstanding principal balances of her 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 it is not more than the old mortgage principal just before the refinancing.
taxmap/pubs/p4681-002.htm#en_us_publink1000192061
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 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)$
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 (do not include the FMV of the same asset in more than one category)
AssetsFMV Immediately Before
the Cancellation
16.Cash and bank account balances$
17.Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $
18.Cars and other vehicles$
19.Computers$
20.Household goods and furnishings (for example, appliances, electronics, furniture, etc.)$
21.Tools$
22.Jewelry$
23.Clothing$
24.Books$
25.Stocks and bonds$
26.Investments in coins, stamps, paintings, or other collectibles$
27.Firearms, sports, photographic, and other hobby equipment$
28.Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts)$
29.Interest in a pension plan$
30.Interest in education accounts$
31.Cash value of life insurance$
32.Security deposits with landlords, utilities, and others$
33.Interests in partnerships$
34.Value of investment in a business$
35.Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $
36.Other assets not included above$
37.FMV of total assets immediately before the cancellation. Add lines 16 through 36.$
Part III. Insolvency
38.Amount of Insolvency. Subtract line 37 from line 15. If zero or less, you are not insolvent. $
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Example 2.(p9)

In 2006, Steve acquired his main home for $200,000, subject to a mortgage of $175,000. In 2007, he took out a home equity loan for $10,000, secured by his main home, which he used to pay off personal credit cards.
In 2008, when the outstanding principal on his mortgage was $170,000 and the outstanding principal on his home equity loan was $9,000, he refinanced the two loans into one loan in the amount of $200,000. The FMV of the home at the time of refinancing was $210,000. He used the additional $21,000 ($200,000 new mortgage loan minus $179,000 outstanding principal balances on the mortgage and home equity loan) to cover medical expenses.
After refinancing, Steve's qualified principal residence indebtedness is $170,000 because the debt resulting from the refinancing is qualified principal residence indebtedness only to the extent it refinances debt that had been secured by the main home and was used to buy, build, or substantially improve the main home.
taxmap/pubs/p4681-002.htm#en_us_publink1000192072

Main home.(p9)

rule
Your main home is the one in which you live most of the time. You can have only one main home at any one time.
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_publink1000192074

Exclusion limit.(p9)

rule
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 home or to your financial condition.
taxmap/pubs/p4681-002.htm#en_us_publink1000192075

Ordering rule.(p9)

rule
If only a part of a loan is qualified principal residence indebtedness, the exclusion applies only to the extent the amount canceled is more than the amount of the loan (immediately before the cancellation) that is not qualified principal residence indebtedness. The remaining part of the loan may qualify for another exclusion.
taxmap/pubs/p4681-002.htm#en_us_publink1000192076

Example.(p9)

Ken incurred recourse debt of $800,000 when he bought his main home 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 job paying a comparable salary. Ken's home 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 exclusion applies).
taxmap/pubs/p4681-002.htm#en_us_publink1000192077

How to report the qualified principal residence indebtedness exclusion.(p9)

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