Contents

What's New .................. 1

Reminder .................... 2

Introduction .................. 2

Common Situations Covered in This

Publication ................ 2

Chapter 1. Canceled Debts ........ 3

Form 1099-C ............... 3

Discounts and Loan

Exceptions ................... 4

Gifts, Bequests, Devises, and

Inheritances .............. 4

Student Loans .............. 4

Deductible Debt ............. 5

Price Reduced After Purchase .....6

Exclusions ................... 6

Bankruptcy ................ 6

Insolvency ................. 6

Insolvency Worksheet .......... 7

Qualified Principal Residence

Indebtedness ............ 10

Bankruptcy and Insolvency ...... 10

Qualified Farm Indebtedness ..... 11

Qualified Real Property

Business Indebtedness ...... 12

Chapter 2. Foreclosures and

Repossessions ............ 12

Worksheet for Foreclosures and

Reposessions ........... 13

Pub4681.

What’s New

Discharge of qualified principal residence

indebtedness before 2026. Qualified princi-

pal residence indebtedness can be excluded

from income for discharges before January 1,

2026.

Department

of the

Treasury

Foreclosures,

Repossessions,

and

Abandonments

(for Individuals)

Fileid: … ions/p4681/2023/a/xml/cycle04/source (Init. & Date) _______

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544

For which you are liable, or

The lender offers a discount for the early

payment of the debt, or

The lender agrees to a loan modification

that results in the reduction of the principal

balance of the debt.

Schedule E (Form 1040), line 3, if the debt

is related to nonfarm rental of real property;

Form 4835, line 6, if the debt is related to a

farm rental activity for which you use Form

on crops or livestock produced by a tenant;

or

Schedule F (Form 1040), line 8, if the debt

is farm debt and you are a farmer.

If you had a student loan that was dis-

charged after December 31, 2020, and

the amount of the discharged loan is

1. A financial institution.

2. A credit union.

c. The National Credit Union Administra-

d. Any other federal executive agency,

4. A corporate subsidiary of a financial insti-

tution or credit union (if the affiliation sub-

jects the subsidiary to federal or state reg-

is a significant trade or business.

B is used to identify cancellation of debt as a re-

eral or state court proceeding other than bank-

ruptcy.

tion of deficiency period. Code C is used to

identify cancellation of debt either when the

statute of limitations for collecting the debt ex-

pires or when the statutory period for filing a

claim or beginning a deficiency judgment pro-

ceeding expires. In the case of the expiration of

a statute of limitations, an identifiable event oc-

curs only if and when your affirmative defense

of the statute of limitations is upheld in a final

torily end or bar the creditor's right to pursue

collection of the debt. This event applies to a

mortgage lender or holder who is barred from

pursuing debt collection after a power of sale in

the mortgage or deed of trust is exercised.

ilar proceeding. Code E is used to identify

cancellation of debt as a result of a probate

court or similar legal proceeding.

received,

Gifts, Bequests, Devises,

and Inheritances

tain circumstances, you may be able to exclude

amounts from gross income as a result of the

cancellation or repayment of certain student

loans. These exclusions are for:

Student loan cancellation due to meeting

certain work requirements;

to meeting certain work requirements. If

the cancellation must be pursuant to a provision

in the student loan that all or part of the debt will

be canceled if you work:

For a certain period of time,

In certain professions, and

For any of a broad class of employers.

later.

section 170(b)(1)(A)(ii). This is an educa-

tional organization that maintains a regular fac-

ulty and curriculum and normally has a regularly

enrolled body of students in attendance at the

place where it carries on its educational activi-

ties.

lowing.

empt under section 501(c)(3); and that

has assumed control of a state, county, or

municipal hospital; and whose employees

are considered public employees under

state law.

4. An educational organization described in

section 170(b)(1)(A)(ii), if the loan is

a. As part of an agreement with an entity

described in (1), (2), or (3) under

which the funds to make the loan were

with unmet needs where services pro-

vided by the students (or former stu-

dents) are for or under the direction of

a governmental unit or a tax-exempt

section 501(c)(3) organization.

A loan for postsecondary educational ex-

penses.

A private education loan.

A loan from an educational organization

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

The United States, or an instrumentality or

agency thereof.

A state or territory of the United States; or

the District of Columbia; or any political

Is not made, insured, or guaranteed under

Title IV of the Higher Education Act of

1965; and

Is issued expressly for postsecondary edu-

rower from the private educational lender.

A private education loan does not include

an extension of credit under an open end

consumer credit plan, a reverse mortgage

transaction, a residential mortgage trans-

action, or any other loan that is secured by

real property or a dwelling.

of soliciting, making, or extending private

Religious.

Educational.

Literary.

Testing for public safety.

Fostering national or international amateur

sports competition (but only if none of its

debts and your accountant forgives part of the

amount you owe for the accounting services.

How you treat the canceled debt depends on

your method of accounting.

Cash method. You don't include the can-

celed debt in income because payment of

the debt would have been deductible as a

business expense in 2023.

Accrual method. Unless another exception

or exclusion applies, you must include the

the expense was deductible in 2022 when

you incurred the debt.

The entire amount of recourse debt;

The amount of nonrecourse debt that isn't

in excess of the FMV of the property that is

The amount of nonrecourse debt in excess

of the FMV of the property subject to the

nonrecourse debt, to the extent nonre-

course debt in excess of the FMV of the

property subject to the debt is forgiven.

You can use the Insolvency Worksheet

to help calculate the extent that you

were insolvent immediately before the

Example 1—amount of insolvency more

debt canceled, you can exclude the entire

$5,000 canceled debt from income.

the box on line 1b of Form 982 and enter $5,000

on line 2. You complete Part II to reduce the tax

attributes, as explained under Reduction of Tax

Attributes, later. You don’t include any of the

$10,000 and the FMV of the total assets imme-

diately before the cancellation was $7,000. In

this case, you are insolvent to the extent of

$3,000 ($10,000 total liabilities minus $7,000

FMV of the total assets) immediately before the

cancellation. Because the amount of the can-

$10,000 for which you were jointly and severally

liable. None of the exceptions to the general

rule that canceled debt is included in income

apply. The debt (originally $12,000) was incur-

red to finance your purchase of a $9,000 motor-

cycle and your spouse's purchase of a laptop

computer and software for personal use for

$3,000. You each received a 2023 Form 1099-C

from the bank showing the entire canceled debt

of $10,000 in box 2. Based on the use of the

loan proceeds, you both agreed that you were

responsible for 75% of the debt and your

spouse was responsible for the remaining 25%.

Therefore, your share of the debt is $7,500

rate Insolvency Worksheet and determines your

spouse was insolvent to the extent of $4,000

($9,000 total liabilities minus $5,000 FMV of the

total assets). Your spouse can exclude the en-

tire canceled debt of $2,500.

you check the box on line 1b of Form 982 and

enter $5,000 on line 2. You complete Part II to

reduce the tax attributes, as explained under

Reduction of Tax Attributes, later. You must in-

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)

Liabilities (debts)

1. Credit card debt $

2. Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can

3. Car and other vehicle loans $

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

For more information about the basis of

Example 2—both insolvency and quali-

were from the trade or business of farming. You

received a 2023 Form 1099-C from the qualified

box 2. The FMV of your total assets on March 2,

2023 (immediately before the cancellation of

the credit card debt), was $7,000 and your total

liabilities at that time were $11,000. Your adjus-

celed debt under the insolvency exclusion be-

cause you are insolvent to the extent of $4,000

immediately before the cancellation ($11,000

total liabilities minus $7,000 FMV of total as-

sets). You must reduce the tax attributes under

the insolvency rules before applying the rules

for qualified farm debt.

$6,000 of canceled qualified farm debt. The

limit on your exclusion from income of canceled

qualified farm debt is $7,000, the sum of:

1. Your adjusted tax attributes of $3,000 (the

$7,000 NOL minus the $4,000 reduction of

tax attributes required because of the

Form 982 and enter $10,000 on line 2. You

complete Part II to reduce the tax attributes, as

explained under Reduction of Tax Attributes,

later. You don’t include any of the canceled debt

in income.

ness exclusion when insolvent to the extent

of canceled debt. The facts are the same as

in Example 2, except that immediately before

the cancellation, you were insolvent to the ex-

$10,000 on line 2. You complete Part II to re-

duce the tax attributes based on the insolvency

exclusion, as explained under Reduction of Tax

Attributes, later. You don’t include any of the

canceled debt in income.

Qualified Real Property

Business Indebtedness

You can elect to exclude canceled qualified real

property business indebtedness from income.

Qualified real property business indebtedness

veloped and held primarily for sale to cus-

tomers in the ordinary course of business.

2. It is secured by that real property. As long

as certain other requirements are met, in-

debtedness that is secured by 100% of the

ownership interest in a disregarded entity

holding real property will be treated as in-

erty. For more information, and for the re-

quirements that must be met, see

Revenue Procedure 2014-20, available at

IRS.gov/irb/2014-9_IRB#RP-2014-20.

b. After 1992, if the debt is either (i)

qualified acquisition indebtedness

(defined next), or (ii) debt incurred to

refinance qualified real property busi-

ness debt incurred or assumed before

1993 (but only to the extent the

amount of such debt doesn't exceed

Debt incurred or assumed to acquire, con-

struct, reconstruct, or substantially improve

real property that is used in a trade or busi-

ness and secures the debt; or

1. The excess (if any) of the outstanding prin-

cipal amount of the qualified real property

business debt (immediately before the

cancellation) over the FMV (immediately

before the cancellation) of the business

real property securing the debt, or

2. The total adjusted basis of depreciable

real property you held immediately before

Note. When figuring the first limit in (1)

If you timely filed your tax return without

Your business encountered financial difficul-