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Category: Questions about Income

Form 982: What is a "discharge of qualified real property business indebtedness"?

If you had debt cancelled and are no longer obligated to repay the debt, you generally must include the amount of cancelled debt in your income. However, if it was a discharge of real property business indebtedness, the debt generally does not have to be added to your return as income.

What is real property business indebtedness?

Qualified real property business indebtedness is indebtedness:

  1. that is incurred or assumed in connection with real property used in a trade or business.
  2. that is secured by that real property.
  3. that was incurred or assumed:
    a. Before 1993, or
    b. After 1992, if the debt is either (i) qualified acquisition indebtedness 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 does not exceed
    the amount of debt being refinanced).
  4. that is a debt to which you elect to apply these rules.

*Note: This provision does not apply to a corporation.

Qualified acquisition indebtedness is

  1. 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
  2. debt resulting from the refinancing of qualified acquisition indebtedness, to the extent that the amount of such debt does not exceed the amount of debt being refinanced.

 

What amount of cancelled debt can be excluded from income?

There are a few limitations as to the amount that you can actually exclude from income due to a discharge of real property business indebtedness. First, you cannot exclude more than the excess of the outstanding principal amount of the debt (immediately before the cancellation) over the net Full Market Value (FMV) (as of that time) of the property securing the debt, reduced by the outstanding principal amount of other qualified real property business indebtedness secured by that property (as of that time). The amount that can be excluded is further limited to the aggregate adjusted basis (as of the first day of the next tax year or the date of disposition, whichever is earlier) of depreciable real property you held immediately before the discharge. This does not include any property that was acquired in contemplation of the discharge. Any excess could not be excluded, and would be included in income.

 

To locate Form 982 within our program go to Income > Other Income > Less Common Income > Cancellation of Debt > Exclusions (Form 982) or use the FORMS Tab on the right hand side of the screen.

For more information, please review Publication 4681 and Form 982.