What this line means
If you checked box 1e (qualified principal residence indebtedness), enter the amount of excluded debt you elect to apply as a reduction to the basis of your principal residence. Under Section 108(h)(1), this election lets you reduce your home’s basis instead of reducing other tax attributes like NOLs or credit carryovers. The basis reduction cannot exceed the basis of your principal residence at the start of the next tax year.
Does this apply to you?
- You checked box 1e on line 1 for qualified principal residence indebtedness
- You still own the home after the debt cancellation (short sale or foreclosure may mean you no longer own it)
- You want to reduce your home’s basis instead of reducing other tax attributes
- You have sufficient basis in your home to absorb the reduction
Easy to overlook
This election only applies to the principal residence exclusion on line 1e If you checked any other box on line 1 (bankruptcy, insolvency, farm debt, or real property business debt), you cannot use line 3. Those exclusion types follow the standard attribute reduction order in Part II. Filers who were both insolvent and had a principal residence discharge sometimes check the wrong box and try to use this line. 1 IRS Form 982 Instructions — Line 3
The Section 121 exclusion may make this basis reduction painless When you eventually sell your home, you can exclude up to $250,000 of gain ($500,000 if married filing jointly) under Section 121. If the basis reduction from line 3 is smaller than the Section 121 exclusion you expect to use, the reduced basis may never result in additional tax. This makes the line 3 election more attractive than reducing NOLs or credits that have near-term value. 2 IRS Publication 4681 — Canceled Debts, Foreclosures, Repossessions, and Abandonments
Watch out for this
Reducing your home’s basis below zero. The basis reduction on line 3 cannot drop your home’s basis below zero. If the excluded amount exceeds your remaining basis, you can only reduce the basis to zero — the rest of the excluded amount must reduce other tax attributes in the standard order. Make sure you know your current adjusted basis before making this election.
Footnotes
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IRS Form 982 Instructions, Line 3. 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 ↩