What this line means
Check this box if the canceled debt was qualified principal residence indebtedness — mortgage debt you took out to buy, build, or substantially improve your main home, and the home secured the debt. This exclusion was created by the Mortgage Forgiveness Debt Relief Act of 2007 and has been extended through 2025. The maximum exclusion is $750,000 ($375,000 if married filing separately).
Does this apply to you?
- You went through a foreclosure, short sale, or mortgage modification on your main home and received a Form 1099-C
- You had a home equity loan forgiven, but only the portion used to buy, build, or substantially improve your home qualifies
- Your canceled mortgage debt was $750,000 or less ($375,000 if married filing separately)
- You are excluding the debt for a discharge that occurred in 2025 or earlier (check current law for extensions beyond 2025)
Easy to overlook
Cash-out refinance amounts do not qualify as principal residence indebtedness If you refinanced your mortgage and took cash out for credit card payoff, vacations, or other non-home expenses, that portion of the debt is not qualified principal residence indebtedness. Only the amount used to acquire, construct, or substantially improve the home qualifies. A $300,000 refinance where $50,000 was cash-out means only $250,000 of any forgiven amount can use this exclusion. 1 IRS Publication 4681 — Canceled Debts, Foreclosures, Repossessions, and Abandonments
You can elect to reduce your home’s basis on line 3 instead of reducing other tax attributes Under Section 108(h), when you check box 1e you may elect to reduce the basis of your principal residence by the excluded amount. This avoids reducing NOLs, credits, or other attribute carryovers. If you plan to stay in the home long-term, the basis reduction increases gain when you eventually sell — but the Section 121 exclusion ($250,000/$500,000) may cover it. 2 IRS Form 982 Instructions — Line 1e
Watch out for this
Assuming all mortgage debt qualifies. Second mortgages and home equity lines of credit only qualify if the proceeds were used to buy, build, or substantially improve the home. A HELOC used for medical bills or college tuition is not qualified principal residence indebtedness, even though the home secures it. If that debt is canceled, you need a different exclusion — typically insolvency on line 1b.
Footnotes
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IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, Chapter 1. https://www.irs.gov/pub/irs-pdf/p4681.pdf ↩
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IRS Form 982 Instructions, Line 1e and Line 3. https://www.irs.gov/instructions/i982 ↩