What this line means
The reduction applied to your property basis because you excluded canceled debt from income. This is the fifth attribute in the Section 108(b)(2) reduction order. Basis reduction is dollar-for-dollar and applies to both depreciable and nondepreciable property you held at the beginning of the tax year after the discharge. This is the most common attribute reduced because many filers have little or no NOLs, credits, or capital losses to absorb the exclusion first.
Does this apply to you?
- You excluded canceled debt from income and still have remaining excluded debt after reducing attributes on lines 4 through 7
- You own property (real estate, vehicles, equipment, investments) with positive adjusted basis
- You did not elect to reduce depreciable property basis first on line 10b (which would bypass this standard ordering)
- You checked box 1b (insolvency), 1a (bankruptcy), or 1c (farm debt) and need to reduce basis under the standard rules
Easy to overlook
You choose which properties to reduce, but the total must equal line 8 Section 1017 gives you flexibility in allocating the basis reduction across your properties. You can reduce depreciable property basis before nondepreciable property to preserve basis in assets you might sell at a gain. Filers who let the reduction fall on the wrong asset end up with larger taxable gains later. Make a deliberate allocation. 1 IRS Form 982 Instructions — Line 8
Basis cannot be reduced below zero for any property The reduction for each property stops at zero. If your total basis across all qualifying property is less than the remaining excluded debt, the excess simply disappears — you do not owe tax on it and you do not carry it forward. This is one of the rare situations where excluded debt has no future tax consequence at all. 2 IRS Publication 4681 — Canceled Debts, Foreclosures, Repossessions, and Abandonments
Watch out for this
Reducing basis without tracking the changes for future returns. When you sell property with reduced basis, your taxable gain is higher (or your deductible loss is smaller) because the basis is lower. If you do not record the adjusted basis in your files, you may understate gains on future sales. Keep Form 982 and your basis allocation notes with your permanent tax records.
Footnotes
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IRS Form 982 Instructions, Line 8. https://www.irs.gov/instructions/i982 ↩
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IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, Chapter 1. https://www.irs.gov/pub/irs-pdf/p4681.pdf ↩