All articles 6 min read

Qualified Real Property Business Debt: Reducing Tax Attributes: Canceled Debt and Property Loss (2025 IRS Guide)

This guide covers “Qualified Real Property Business Debt: Reducing Tax Attributes” 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

If you exclude canceled debt from income, you must reduce certain tax attributes (but not below zero) by the amount excluded. Use Part II of Form 982 to reduce your tax attributes. The order in which the tax attributes are reduced depends on the reason the canceled debt was excluded from income. If the total amount of canceled debt excluded from income (line 2 of Form 982) was more than your total tax attributes, the total reduction of tax attributes in Part II of Form 982 will be less than the amount on
line 2.

Qualified Real Property Business Debt: Reducing Tax Attributes

If you make an election to exclude canceled qualified real property business debt from income, you must reduce the basis of your depreciable real property (but not below zero) by the amount of canceled qualified real property business debt excluded from income. The basis reduction is made at the beginning of 2026. However, if you dispose of your depreciable real property before the beginning of 2026, you must reduce its basis (but not below zero) immediately before the disposition. Enter the amount of the basis reduction on line 4 of Form 982.

Example 1—qualified real property business indebtedness and insolvency with reduction in basis.

In 2020, you bought a retail store for use in a business 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 and 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 tax attributes included the basis of depreciable property, an NOL, and a capital loss carryover to 2025.

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 principal amount of the debt. Immediately before the bank entered into the workout agreement, you were insolvent to the extent of $12,000. At that time, 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 canceled debt of $20,000 in box 2.

You must apply the insolvency exclusion before applying the exclusion for canceled qualified real property business indebtedness. Under the insolvency exclusion rules, you can exclude $12,000 of the canceled debt from income. You elect to reduce the basis of depreciable property before reducing other tax attributes. Under that election, you must first reduce the basis in the depreciable real property used in the trade or business that secured the canceled debt. After the basis reduction, the adjusted basis in that property is $198,000 ($210,000 adjusted basis before entering into the workout agreement minus $12,000 of canceled debt excluded from income under the insolvency exclusion).

You may be able to exclude the remaining $8,000 of canceled debt from income under the exclusion for qualified real property business indebtedness, if you elect to apply it. The amount you can exclude is limited. It can’t be more than:

  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 (immediately before the cancellation) of the qualified real property, which secured the debt), or

  2. $198,000 (the total adjusted basis of depreciable real property you held immediately before the cancellation determined after reductions for accumulated depreciation and canceled debt excluded under the insolvency exclusion ($220,000 minus $10,000 minus $12,000)).

Since both limits are more than the $8,000 of remaining canceled debt ($20,000 minus $12,000), you can exclude $8,000 under the qualified real property business indebtedness exclusion.

You check the boxes on lines 1b and 1d of Form 982. You complete Part II of Form 982 to reduce the basis in the depreciable real property by $20,000, the amount of the canceled debt excluded from income. You enter $8,000 on line 4 and $12,000 on line 5.

Example 2—qualified real property business indebtedness with insolvency and reduction in NOL.

You own depreciable real property used in a retail business. Your adjusted basis in the property is $145,000. The FMV of the property is $120,000. The property is subject to $134,000 of recourse debt, which is secured by the property. You had no other debt secured by that depreciable real property. You also had a $15,000 NOL in 2025.

During 2025, you entered into a workout agreement with the lender under which the lender canceled $14,000 of the debt on the real property used in the business. Immediately before the cancellation, you were insolvent to the extent of $10,000. You exclude $10,000 of the canceled debt from income under the insolvency exclusion. As a result of that exclusion, you reduce the NOL by $10,000.

You may be able to exclude the remaining $4,000 of canceled debt from income under the qualified real property business indebtedness exclusion, if you elect to apply it. The amount you can exclude is limited. It can’t be more than:

  1. $14,000 (the excess of the $134,000 outstanding principal amount of your qualified real property business debt (immediately before the cancellation) over the $120,000 FMV (immediately before the cancellation) of that qualified real property, which secured the debt), or

  2. $145,000 (the total adjusted basis of depreciable real property held immediately before the cancellation of debt).

Since both limits ($14,000 and $145,000) are more than the remaining $4,000 of canceled debt, you can also exclude the remaining $4,000 of canceled debt.

You check the boxes on lines 1b and 1d of Form 982 and enter $14,000 on line 2. You complete Part II of Form 982 to reduce the basis of depreciable real property and the 2025 NOL by entering $4,000 on line 4 and $10,000 on line 6. None of the canceled debt is 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

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.

Back to all articles