Start For Free

Fast, Secure, and Always Accurate!

Back to List

Category: Questions about Income

Form 982: What is a "discharge of qualified principal residence indebtedness"?

If you had debt canceled and are no longer obligated to repay the debt, you generally must include the amount of canceled debt in your income. However, if it was a discharge of qualified principal residence indebtedness, you may be able to exclude all or part of this amount from being included in your income. However, if the cancellation of debt occurred in a title 11 case, you cannot use this exclusion. You must then apply the bankruptcy exclusion rather than the qualified principal residence indebtedness exclusion. If your debt was discharged due to a title 11 case, click here. If you were insolvent immediately before the cancellation, you can elect to apply the insolvency exclusion instead of the of applying the qualified principal residence indebtedness exclusion.

What is qualified principal residence indebtedness?

Qualified principal residence indebtedness is any mortgage that you took out to buy, build, or substantially improve your principal residence. The mortgage must be secured by your principal residence/main home. Any debt secured by your principal residence that you use to refinance qualified principal residence indebtedness is treated as qualified principal residence indebtedness. However, only up to the amount of the old mortgage principal just before the refinancing qualifies for exclusion. Any additional debt that you incurred to substantially improve your principal residence is also treated as qualified principal residence indebtedness.

If the amount of your original mortgage is more than the total of the cost of your principal residence plus the cost of any substantial improvements, the full amount of the original mortgage does not qualify for exclusion. Only the debt that is not more than the cost of your principal residence plus improvements is qualified principal residence indebtedness.

What amount of canceled debt can be excluded from income?

The exclusion applies ONLY to debt discharged after 2006 and before 2010. The maximum amount that you can treat as qualified principal residence indebtedness is $2 million ($1 if filing Married Filing Separately).

You cannot exclude from income discharge of qualified principal residence indebtedness if the discharge 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 residence 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 that the amount discharged exceeds the amount of the loan (immediately before the discharge) that is not qualified principal residence indebtedness.

Example: Assume your principal residence is secured by a debt of $1 million, of which $800,000 is qualified principal residence indebtedness. If your residence is sold for $700,000 and $300,000 of debt is discharged, you would only be able to exclude $100,000 of debt (the $300,000 that was discharged minus the $200,000 of nonqualified debt). The remaining $200,000 of nonqualified debt may qualify in whole or in part for one of the other exclusions, such as the insolvency exclusion.

To view a copy of the IRS form click here.
If you would like more information, please review Publication 4681.
To enter Form 982 into our program go to Income > Other Income > Less Common Income > Cancellation of Debt > Form 982