Qualified Farm Indebtedness: Canceled Debt and Property Loss (2025 IRS Guide)

This guide covers “Qualified Farm Indebtedness” 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.

Qualified Farm Indebtedness

You can exclude canceled farm debt from income on your 2025 return if all of the following apply.

• The debt was incurred directly in connection with your operation of the trade or business of farming.

• 50% or more of your total gross receipts for 2022, 2023, and 2024 were from the trade or business of farming.

• The cancellation was made by a qualified person. A qualified person is an individual, organization, partnership, association, corporation, or other person who is actively and regularly engaged in the business of lending money. A qualified person also includes any federal, state, or local government or agency or instrumentality of one of those governments. For example, the U.S. Department of Agriculture is a qualified person. A qualified person can’t be related to you, can’t be the person from whom you acquired the property (or a person related to this person), and can’t be a person who receives a fee due to your investment in the property (or a person related to this person).

For the definition of the term “related person,” see Related persons under At-Risk Amounts in Pub. 925, Passive Activity and At-Risk Rules.

Other exclusions must be applied before the qualified farm indebtedness exclusion.

This exclusion doesn’t 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.

Exclusion limit.

The amount of canceled qualified farm debt you can exclude from income under this exclusion is limited. It can’t be more than the sum of:

1. Your adjusted tax attributes, and

2. The total adjusted basis of qualified property you held at the beginning of 2026.

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 Pub. 551.

Adjusted tax attributes.

Adjusted tax attributes means the sum of the following items.

1. Any net operating loss (NOL) for 2025 and any NOL carryover to 2025.

2. Any net capital loss for 2025 and any capital loss carryover to 2025.

3. Any passive activity loss carryover from 2025.

4. Three times the sum of any:

   1. General business credit carryover to or from 2025,

   2. Minimum tax credit available as of the beginning of 2026,

   3. Foreign tax credit carryover to or from 2025, and

   4. Passive activity credit carryover from 2025.

Qualified property.

This is any property you use or hold for use in your trade or business or for the production of income.

How to report the qualified farm indebtedness exclusion.

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 or 1040-SR. 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.

Example 1—only qualified farm indebtedness exclusion applies.

In 2025, you were released from an obligation to pay a $10,000 debt that was incurred directly in connection with the trade or business of farming. You received a Form 1099-C from the qualified lender showing discharged debt of $10,000 in box 2. For 2022, 2023, and 2024 tax years, at least 50% of your total gross receipts were from the trade or business of farming. Your adjusted tax attributes are $5,000 and you have $3,000 total adjusted basis in qualified property at the beginning of 2026. You had no other debt canceled during 2025 and no other exception or exclusion relating to canceled debt income applies.

You can exclude $8,000 ($5,000 of adjusted tax attributes plus $3,000 total adjusted basis in qualified property at the beginning of 2026) of the $10,000 canceled debt from income. You check the box on line 1c of Form 982 and enter $8,000 on line 2. Also, you complete Part II to reduce the tax attributes, as explained under Reduction of Tax Attributes, later. The remaining $2,000 of canceled qualified farm debt is included in your income on Schedule F (Form 1040), line 8.

Example 2—both insolvency and qualified farm indebtedness exclusions apply.

On March 2, 2025, you were released from an obligation to pay a $10,000 business credit card debt that was used directly in connection with a farming business. For 2022, 2023, and 2024 tax years, at least 50% of your total gross receipts were from the trade or business of farming. You received a 2025 Form 1099-C from the qualified lender showing discharged debt of $10,000 in box 2. The FMV of your total assets on March 2, 2025 (immediately before the cancellation of the credit card debt), was $7,000 and your total liabilities at that time were $11,000. Your adjusted tax attributes (a 2025 NOL) are $7,000 and you have $4,000 total adjusted basis in qualified property at the beginning of 2026.

You qualify to exclude $4,000 of the canceled debt under the insolvency exclusion because you are insolvent to the extent of $4,000 immediately before the cancellation ($11,000 total liabilities minus $7,000 FMV of total assets). You must reduce the tax attributes under the insolvency rules before applying the rules for qualified farm debt.

You also qualify to exclude the remaining $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 $4,000 exclusion of canceled debt under the insolvency exclusion), and

2. Your total adjusted basis of $4,000 in qualified property held at the beginning of 2026.

You check the boxes on lines 1b and 1c of 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.

Example 3—no qualified farm indebtedness 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 extent of the full $10,000 canceled debt. Because the exclusion for qualified farm debt doesn’t apply to the extent that your insolvency (immediately before the cancellation) was equal to the full amount of the canceled debt, you check only the box on line 1b of Form 982 and enter $10,000 on line 2. You complete Part II to reduce 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.

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 — Qualified Farm Indebtedness — 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.