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Qualified Real Property Business Debt: Exclusion Requirements: Canceled Debt and Property Loss (2025 IRS Guide)

This guide covers “Qualified Real Property Business Debt: Exclusion Requirements” 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 Real Property Business Debt: Exclusion Requirements

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. Real property used in a trade or business doesn’t include real property developed and held primarily for sale to customers in the ordinary course of business.

  2. It is secured by that real property. As long as certain other requirements are met, indebtedness that is secured by 100% of the ownership interest in a disregarded entity holding real property will be treated as indebtedness that is secured by real property. For more information, and for the requirements that must be met, see Revenue Procedure 2014-20, available at IRS.gov/irb/2014-09_IRB#RP-2014-20.

  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 doesn’t exceed the amount of debt being refinanced).

  4. It is debt to which you elect to apply these rules.

.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..

Definition of qualified acquisition indebtedness.

Qualified acquisition indebtedness is:

  • Debt incurred or assumed to acquire, construct, reconstruct, or substantially improve real property that is used in a trade or business and secures the debt; or

  • Debt resulting from the refinancing of qualified acquisition indebtedness, to the extent the amount of the debt doesn’t exceed the amount of debt being refinanced.

Other exclusions must be applied before the qualified real property business 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 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.

Exclusion limit.

The amount of canceled qualified real property business debt you can exclude from income under this exclusion has two limits. The amount you can exclude can’t be more than either:

  1. The excess (if any) of the outstanding principal 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 the cancellation of the qualified real property business debt (other than depreciable real property acquired in contemplation of the cancellation).

Note:

When figuring the first limit in (1) above, reduce the FMV of the business real property securing the debt (immediately before the cancellation) by the outstanding principal amount of any other qualified real property business debt secured by that property (immediately before the cancellation). When figuring the second (overall) limit in (2) above, 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 or because of other basis adjustments that may apply to that depreciable property.

For more information about the basis of property, see Pub. 551.

How to elect the qualified real property business debt exclusion.

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 federal income tax return (including extensions) for 2025 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 2025 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.

Example—full qualified real property business indebtedness exclusion.

In 2019, you bought a retail store for use in a business that you operated as a sole proprietorship. You 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. You used the property in the business continuously since it was purchased. You had no other debt secured by that depreciable real property. In addition to the retail store, you owned depreciable equipment and furniture with an adjusted basis of $50,000.

Your business encountered financial difficulties in 2025. On September 21, 2025, the bank financing the retail store loan entered into a workout agreement with you 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 you a 2025 Form 1099-C showing discharged debt of $20,000 in box 2. You had no tax attributes other than the basis to reduce and you didn’t qualify for any exception or exclusion other than the qualified real property business debt exclusion.

You elect to apply the qualified real property business debt exclusion to the canceled debt. The amount of canceled qualified real property business debt that you can exclude from income is limited. The amount you can exclude can’t be more than either:

  1. $20,000 (the excess of the $185,000 outstanding principal amount of your qualified real property business debt immediately before the cancellation over the $165,000 FMV of the business real property securing the debt), or

  2. $210,000 (the total adjusted basis of the depreciable real property you held immediately before the cancellation).

.

Thus, you can exclude the entire $20,000 of canceled qualified real property business debt from income. You check the box on line 1d of Form 982 and enter $20,000 on line 2. You must also use line 4 of Form 982 to reduce the basis in depreciable real property by the $20,000 of canceled qualified real property business debt excluded from income, as explained under Reduction of Tax Attributes, later.

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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