Insolvency: Canceled Debt and Property Loss (2025 IRS Guide)
This guide covers “Insolvency” within canceled debt and property loss. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.
Adapted from Publication 4681 (2025), Canceled Debts, Foreclosures, Repossessions, and Abandonments, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.
Context for these rules
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.
Insolvency
Insolvency Worksheet
| 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) | 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 main home, any additional home, or property held for investment or used in a trade or business) | $ |
| 3. | Car and other vehicle loans | $ |
| 4. | Medical bills owed | $ |
| 5. | Student loans | $ |
| 6. | Accrued or past-due mortgage interest | $ |
| 7. | Accrued or past-due real estate taxes | $ |
| 8. | Accrued or past-due utilities (water, gas, electric, etc.) | $ |
| 9. | Accrued or past-due childcare costs | $ |
| 10. | Federal or state income taxes remaining due (for prior tax years) | $ |
| 11. | Judgments | $ |
| 12. | Business debts (including those owed as a sole proprietor or partner) | $ |
| 13. | Margin debt on stocks and other debt to purchase or secured by investment assets other than real property | $ |
| 14. | Other liabilities (debts) not included above | $ |
| 15. | Total liabilities immediately before the cancellation. Add lines 1 through 14. | $ |
| Part II. Fair market value (FMV) of assets owned immediately before the cancellation (don’t include the FMV of the same asset in more than one category) | ||
| Assets | FMV 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 aren’t insolvent. | $ |
Don’t include a canceled debt in income to the extent that you were insolvent immediately before the cancellation. You don’t qualify for the insolvency exclusion by being an owner of, or a partner in a partnership that owns, a grantor trust or disregarded entity that is insolvent. You must be insolvent to qualify for this exclusion. 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:
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The entire amount of recourse debt;
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The amount of nonrecourse debt that isn’t in excess of the FMV of the property that is security for the debt; and
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The amount of nonrecourse debt in excess of the FMV of the property subject to the nonrecourse debt, to the extent nonrecourse 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 cancellation..
Other exclusions must be applied before the insolvency exclusion.
This exclusion doesn’t apply to a cancellation of debt that occurs in a title 11 bankruptcy case. It also doesn’t 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.
How to report the insolvency exclusion.
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 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.
Example 1—amount of insolvency more than canceled debt.
In 2025, you were released from an obligation to pay a personal credit card debt in the amount of $5,000. You received a 2025 Form 1099-C from the 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. You use the Insolvency Worksheet to determine that the total liabilities immediately before the cancellation were $15,000 and the FMV of the total assets immediately before the cancellation was $7,000. This means that immediately before the cancellation, you were insolvent to the extent of $8,000 ($15,000 total liabilities minus $7,000 FMV of the total assets). Because the amount by which you were insolvent immediately before the cancellation was more than the amount of debt canceled, you can exclude the entire $5,000 canceled debt from income.
When completing the tax return, 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 don’t include any of the $5,000 canceled debt on Schedule 1 (Form 1040), line 8c. None of the canceled debt is included in income.
Example 2—amount of insolvency less than canceled debt.
The facts are the same as in Example 1, except that your total liabilities immediately before the cancellation were $10,000 and the FMV of the total assets immediately 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 canceled debt was more than the amount by which you were insolvent immediately before the cancellation, you can exclude only $3,000 of the $5,000 canceled debt from income under the insolvency exclusion.
You check the box on line 1b of Form 982 and include $3,000 on line 2. Also, you complete Part II to reduce the tax attributes, as explained under Reduction of Tax Attributes, later. Additionally, you must include $2,000 of canceled debt on Schedule 1 (Form 1040), line 8c (unless another exclusion applies).
Example 3—joint debt and separate returns.
In 2025, you and your spouse were released from an obligation to pay a debt of $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 incurred to finance your purchase of a $9,000 motorcycle and your spouse’s purchase of a laptop computer and software for personal use for $3,000. You each received a 2025 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 (75% of $10,000) and your spouse’s share is $2,500 (25% of $10,000). By completing the Insolvency Worksheet, you determine that, immediately before the cancellation of the debt, you were insolvent to the extent of $5,000 ($15,000 total liabilities minus $10,000 FMV of the total assets). You can exclude $5,000 of the $7,500 canceled debt. Your spouse completes a separate 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 entire canceled debt of $2,500.
When completing the separate tax return, 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 include the remaining $2,500 (your $7,500 share of the canceled debt minus the $5,000 extent to which you were insolvent) of canceled debt on Schedule 1 (Form 1040), line 8c (unless another exclusion applies).
When completing the return, your spouse checks the box on line 1b of Form 982 and enters $2,500 on line 2. Your spouse completes Part II to reduce the tax attributes, as explained under Reduction of Tax Attributes, later. Your spouse doesn’t include any of the canceled debt on Schedule 1 (Form 1040), line 8c. None of the canceled debt has to be included in income.
Using the guidance
Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.
Sources and further reading
- Publication 4681 (2025), Canceled Debts, Foreclosures, Repossessions, and Abandonments: Exclusions — Insolvency — Internal Revenue Service; 2025 edition.
The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.