Form 1099-C for Rental Property: Cancellation of Debt, Form 982

What the form says and what it does not

A lender that is a financial institution, a credit union, a federal agency or an organization whose significant business is lending money files Form 1099-C for each debtor when it cancels $600 or more and an identifiable event occurs. The Instructions for Forms 1099-A and 1099-C (April 2025) say the form must be filed regardless of whether the debtor is required to report the debt as income. That sentence is the whole reason for this page: the form is a report of an event, and the tax is decided afterwards.

Three points from the instructions are easy to miss. The debtor’s copy tells you that you must include the discharged amount in income “even if it is less than $600”; the $600 is only the lender’s filing threshold. If an identifiable event has occurred but the debt has not actually been discharged, the debtor instructions say to include it in the year it is actually discharged. And when joint debtors are jointly and severally liable on a debt of $10,000 or more, each can receive a form showing the entire amount, so the amount you report may be a share; Publication 4681 lists state law, who got the loan proceeds and who claimed the interest as factors.

Recourse or nonrecourse: the question that splits the number

A foreclosure or repossession is treated as a sale from which you may realize gain or loss, even if you hand the property back voluntarily (Publication 4681 (2025), chapter 2). The loan type decides how the debt is counted in that sale. Treasury Regulation 1.1001-2 says that the amount realized on a recourse property does not include amounts that are income from discharge of indebtedness, while for a nonrecourse loan the fair market value of the property is not relevant and the full liability counts.

All figures below are our assumptions for a rental held in a trade or business, and the arithmetic follows Table 1-1 in Publication 4681. The loan balance is $700,000, the property is worth $520,000 and its adjusted basis, after depreciation, is $430,000. We ignore selling costs and other income.

The total is the same in this example and the character is not: in Example A $180,000 is ordinary income that can be excluded under section 108 if you qualify, while in Example B the whole $270,000 is gain on a sale and section 108 does not turn it into cancelled debt. How a rental sale is reported, including the depreciation layer, is in our guide to Form 4797 and section 1231 and to depreciation recapture. If you remain personally liable for part of the balance after the transfer, Publication 4681 subtracts that part before comparing the debt with the value, so a partial deficiency waiver changes both numbers.

Abandonment and a deed in lieu are different events. For recourse debt, Publication 4681 says you generally have neither gain nor loss from abandoning until a later foreclosure is completed, and cancelled debt is ordinary income. For nonrecourse debt the abandonment is treated as a sale at the amount of the debt. A voluntary conveyance in lieu of foreclosure is not an abandonment; it is treated as an exchange of the property to satisfy the debt.

Which exclusion fits which situation

Section 108(a)(1) lists the exclusions: a title 11 bankruptcy case, insolvency, qualified farm indebtedness, qualified real property business indebtedness for taxpayers other than C corporations, and qualified principal residence indebtedness. Section 108(a)(2) puts them in order: the bankruptcy exclusion takes precedence, and the farm and real property business exclusions do not apply to the extent you are insolvent.

Two details decide many cases. First, insolvency is tested at the moment before the discharge and counts all assets, including exempt assets: Publication 4681 says assets include the value of retirement accounts, and recourse debt counts in full as a liability while nonrecourse debt counts only up to the value of its collateral, plus any excess that is forgiven. The statute caps the exclusion: it “shall not exceed the amount by which the taxpayer is insolvent.” Second, a flip is not “real property used in a trade or business”: Publication 4681 says that term does not include real property developed and held primarily for sale to customers in the ordinary course of business. If you borrowed to buy a rental, you do not need to be insolvent to use the real property business exclusion, but you must elect it.

Worked example C: a workout on a rental you keep

Keep the same property and loan, but this time the lender agrees to cut the principal from $700,000 to $520,000 and you keep the rental. Assume the loan is qualified acquisition indebtedness (it was used to buy the property), you are not insolvent, you have no other tax attributes and $330,000 of the $430,000 basis is in the building (all our assumptions). Publication 4681 says a principal reduction in a workout is cancelled debt, and on a rental it is Schedule E, line 3 income unless excluded.

The election defers the income and does not erase it: the $180,000 comes back as a larger gain when the property is sold, and 26 U.S.C. 1017(d)(1)(B) says the reduction is treated as a deduction allowed for depreciation, so the recapture rules in our depreciation recapture guide apply to it. The election must be made on a timely filed return, including extensions, by checking line 1d of Form 982, and it can be revoked only with IRS consent. If you filed on time without it, the Instructions for Form 982 allow an amended return within 6 months of the due date of the return, excluding extensions, marked “Filed pursuant to section 301.9100-2”. Publication 4681 has its own example in which a $185,000 loan on a $165,000 store with a $210,000 basis supports the exclusion of $20,000 of cancelled debt.

If you are not electing basis reduction: the order of attributes

If you exclude debt because of bankruptcy or insolvency, section 108(b)(2) reduces your tax attributes in a fixed order: net operating loss, general business credit, minimum tax credit, capital loss carryovers, basis of property, passive activity loss and credit carryovers, and foreign tax credit carryovers. The Instructions for Form 982 list the same order. Dollar-for-dollar reductions apply to losses and basis, and credits are reduced by 33⅓ cents per dollar excluded. A taxpayer can instead elect under section 108(b)(5), on Form 982 line 5, to apply the reduction first to the basis of depreciable property; Publication 4681 orders that reduction with real property that secured the canceled debt first.

For an investor with suspended losses the order matters. Passive activity loss carryovers come near the end, after basis. A foreclosure or sale of your entire interest in a fully taxable transaction to an unrelated person can free those losses in the same year: the Instructions for Form 8582 say losses allocable to the activity are then not limited by the passive rules. Our guide to the Form 8582 allowance covers the ledger. Whether an exclusion elected for the cancelled debt first consumes that carryover is a question for a preparer who sees the whole return.

The 2026 change for a main home

Section 108(a)(1)(E) now reads that qualified principal residence indebtedness qualifies only if it is discharged before January 1, 2026, or subject to an arrangement that is entered into and evidenced in writing before January 1, 2026. Publication 4681 (2025) repeats it in its What’s New box for discharges completed or discharge agreements entered into after December 31, 2025, and the Instructions for Forms 1099-A and 1099-C say the exclusion expires on December 31, 2025. Two consequences follow, both from the text. A Form 1099-C that arrives in early 2027 for a main-home loan discharged in 2026 does not get the line 1e exclusion unless the written-arrangement test is met; the identifiable event date in box 1 and the date of the written agreement are the facts to find. And the exclusion was always limited to a mortgage used to buy, build or substantially improve the main home, secured by it, with a $750,000 cap ($375,000 married filing separately), so a second home or a rental never used it. For interest on the same kind of loan see our guide to the mortgage interest deduction limit.

If you own through a fund: K-1 box 11, code E

A syndication or crowdfunding partnership that has a loan forgiven receives the Form 1099-C itself. The Instructions for Form 1065 say the existence and amount of cancellation of debt income are determined at the partnership level, separately stated on Schedule K and Schedule K-1, and that the extent to which it is taxable is usually determined by each partner under section 108. If the cancellation is reported to the partnership on Form 1099-C, each partner’s share goes in box 11 with code E. The Partner’s Instructions say this amount is generally included in your gross income (Schedule 1, line 8c) and that you may elect under section 108(b)(5) to apply an excluded amount to the basis of depreciable property.

The statute says that sections 108(a), (b), (c) and (g) “shall be applied at the partner level.” So the partnership’s insolvency does not count for you; yours does. Section 1017(b)(3)(C) treats a partner’s interest as depreciable property to the extent of the partner’s share of the partnership’s depreciable property, but only if the partnership makes a corresponding reduction in its basis, which is why Form 982 refers to partnership consent statements. A second effect can arrive in the same K-1: a decrease in your share of partnership liabilities is a deemed distribution, reported in box 19 with code D, and the Partner’s Instructions say that to the extent it exceeds the adjusted basis of your partnership interest the excess is gain from the sale or exchange of the interest. Read both boxes together; our K-1 boxes guide explains the others. Creditors have a separate rule: the 1099-C instructions say debt owned by a partnership is treated as owned by the partners, and pass-through securitized debt arrangements and REMICs are, until further guidance, excused from the penalty for not filing, so a loan fund investor may see cancelled debt without a form.

What a reader can do with this

• Look at box 5 and box 7 first. Box 5 tells you whether the lender treated the loan as recourse; box 7 is the value the lender used. Both change the split between gain and cancelled debt.
• Compare box 2 with your own payoff statement. It can include interest or fees. Ask the lender to correct a wrong amount; the debtor instructions say to contact the creditor.
• Write down the date of the discharge and of any written agreement. The 2026 cut-off for a main home turns on those two dates, and a debt can be discharged in a different year from the identifiable event.
• Build the insolvency worksheet before you decide. Publication 4681 has a worksheet that lists every liability and every asset, retirement accounts included, immediately before the cancellation.
• If you keep a rental, ask whether the real property business election is available. It is made on the return, by Form 982 line 1d, and its price is a lower basis.
• If your debt is on a K-1, check box 11 code E and box 19 code D together and keep the partnership’s statement for your own Form 982.
• If a hard-money or bridge loan on a flip or rental is in trouble, note that the default terms, extension fees and default interest sit in the loan documents; see our guide to hard money loan extensions and default interest before the lender cancels anything.

FAQ

Sources, read and saved on October 23, 2026: IRS Publication 4681 (2025), Canceled Debts, Foreclosures, Repossessions, and Abandonments, dated November 19, 2025; Instructions for Forms 1099-A and 1099-C (Rev. April 2025) and Form 1099-C (Rev. April 2025); Form 982 (Rev. March 2018) and Instructions for Form 982 (Rev. December 2021); IRS “About Form 982” page, last reviewed August 27, 2026; Instructions for Form 1065 (2025); Partner’s Instructions for Schedule K-1 (Form 1065) (2025); Instructions for Form 8582 (2025); 26 U.S.C. 108 and 1017 and Treasury Regulation 1.1001-2 as published by the Legal Information Institute at Cornell. The 2026 editions of the forms and Publication 4681 had not been found when we checked, so line numbers are those of the 2025 editions. This is analysis of public documents, not investment, legal or tax advice.