What this line means
Check this box if the canceled debt was qualified farm indebtedness. This means the debt was incurred directly in connection with operating a farming business, and the lender was a qualified person — typically a bank, credit union, or government agency, not a relative or someone related to you. The exclusion amount cannot exceed the sum of your tax attributes and the aggregate adjusted bases of qualified property.
Does this apply to you?
- You operate a farming business and had farm-related debt canceled or forgiven
- The canceled debt was owed to a qualified lender such as a bank, Farm Credit System institution, or federal or state government agency
- You are not in a Title 11 bankruptcy case (if you are, use line 1a instead)
- At least 50% of your aggregate gross receipts for the prior three tax years came from farming
Easy to overlook
The lender must be a “qualified person” under Section 108(g)(1)(B) Debt canceled by a family member, business partner, or related entity does not qualify as farm indebtedness for this exclusion. The lender must be someone actively and regularly engaged in the business of lending money — a bank, savings institution, or similar. Filers who had informal farm loans forgiven by relatives cannot use this box. 1 IRS Publication 4681 — Canceled Debts, Foreclosures, Repossessions, and Abandonments
The 50% gross receipts test looks back three years You qualify only if at least half of your average annual gross receipts for the three tax years before the discharge came from the trade or business of farming. A farmer who recently transitioned away from farming may not meet this threshold, even if the original debt was farm-related. Run the three-year calculation before checking this box. 2 IRS Form 982 Instructions — Line 1c
Watch out for this
Choosing the farm indebtedness exclusion when the insolvency exclusion would be more beneficial. The farm debt exclusion reduces the basis of qualified property first (particularly depreciable farm assets), which increases taxable gain when you sell that property. If you are also insolvent, the insolvency exclusion on line 1b may preserve more of your property basis. Compare both options before filing.
Footnotes
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IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, Chapter 3. https://www.irs.gov/pub/irs-pdf/p4681.pdf ↩
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IRS Form 982 Instructions, Line 1c. https://www.irs.gov/instructions/i982 ↩