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

This guide covers “Qualified Principal Residence 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 Principal Residence Indebtedness

Qualified principal residence indebtedness is any mortgage you took out to buy, build, or substantially improve your main home. It must also 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.

Example 1—qualified principal residence indebtedness amount after refinance.

In 2024, you bought a main home for $315,000. You 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. Later that year, you took out a second mortgage loan in the amount of $50,000 that was used to add a garage to the home.

In 2025, when the outstanding principal of the first and second mortgage loans was $325,000, you 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. You used the additional $75,000 debt proceeds ($400,000 new mortgage loan minus $325,000 outstanding principal balances of the first and second mortgage loans immediately before the refinancing) to pay off personal credit cards and to pay college tuition for your daughter.

After the refinancing, your qualified principal residence indebtedness is $325,000 because the $400,000 debt resulting from the refinancing is qualified principal residence indebtedness only to the extent it isn’t more than the old mortgage principal just before the refinancing (the $325,000 of outstanding principal on your first and second mortgages, which both qualified as principal residence indebtedness).

Example 2—refinancing home equity loan used for other purposes.

In 2024, you acquired a main home for $200,000, subject to a mortgage of $175,000. Later that year, you took out a home equity loan for $10,000, secured by the main home, which you used to pay off personal credit cards.

In 2025, when the outstanding principal on the mortgage was $170,000, and the outstanding principal on the home equity loan was $9,000, you 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. You 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, your 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.

Main home.

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.

Other exclusions must be applied before the qualified principal residence indebtedness exclusion.

This exclusion doesn’t 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.

Exclusion limit.

The maximum amount you can treat as qualified principal residence indebtedness is $750,000 ($375,000 if married filing separately). You can’t 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.

Ordering 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 isn’t qualified principal residence indebtedness. The remaining part of the loan may qualify for another exclusion.

Example 3—ordering rule on cancellation of nonqualified principal residence debt.

You incurred recourse debt of $800,000 when you bought a main home for $880,000. When the FMV of the property was $1 million, you refinanced the debt for $850,000. At the time of the refinancing, the principal balance of the original mortgage loan was $740,000. You used the $110,000 obtained from the refinancing ($850,000 minus $740,000) to pay off credit cards and to buy a new car.

About 2 years after the refinancing, you lost your job and were unable to get another job paying a comparable salary. Your home had declined in value to between $600,000 and $650,000. Based on your circumstances, the lender agreed to allow a short sale of the property for $620,000 and to cancel the remaining $115,000 of the outstanding $735,000 debt. Under the ordering rule, you can exclude only $5,000 of the canceled debt from income under the exclusion for canceled qualified principal residence indebtedness ($115,000 canceled debt minus the $110,000 amount of the debt that wasn’t qualified principal residence indebtedness). You must include the remaining $110,000 of canceled debt in income on Schedule 1 (Form 1040), line 8c (unless another exclusion applies).

How to report the qualified principal residence indebtedness exclusion.

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.

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

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.

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