26 USC 108 - Income from discharge of indebtedness

U.S Code last checked for updates: Sep 21, 2026

§ 108.

Income from discharge of indebtedness

(a)

Exclusion from gross income

(1)

In general

Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if—

(A)

the discharge occurs in a title 11 case,

(B)

the discharge occurs when the taxpayer is insolvent,

(C)

the indebtedness discharged is qualified farm indebtedness,

(D)

in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness, or

(E)

the indebtedness discharged is qualified principal residence indebtedness which is discharged—

(i)

before January 1, 2026, or

(ii)

subject to an arrangement that is entered into and evidenced in writing before January 1, 2026.

(2)

Coordination of exclusions

(A)

Title 11 exclusion takes precedence

(B)

Insolvency exclusion takes precedence over qualified farm exclusion and qualified real property business exclusion

(C)

Principal residence exclusion takes precedence over insolvency exclusion unless elected otherwise

(3)

Insolvency exclusion limited to amount of insolvency

(b)

Reduction of tax attributes

(1)

In general

(2)

Tax attributes affected; order of reduction

Except as provided in paragraph (5), the reduction referred to in paragraph (1) shall be made in the following tax attributes in the following order:

(A)

NOL

(B)

General business credit

(C)

Minimum tax credit

(D)

Capital loss carryovers

(E)

Basis reduction

(i)

In general

(ii)

Cross reference

(F)

Passive activity loss and credit carryovers

(G)

Foreign tax credit carryovers

(3)

Amount of reduction

(A)

In general

(B)

Credit carryover reduction

(4)

Ordering rules

(A)

Reductions made after determination of tax for year

(B)

Reductions under subparagraph (A) or (D) of paragraph (2)

(C)

Reductions under subparagraphs (B) and (G) of paragraph (2)

(5)

Election to apply reduction first against depreciable property

(A)

In general

(B)

Limitation

(C)

Other tax attributes not reduced

(c)

Treatment of discharge of qualified real property business indebtedness

(1)

Basis reduction

(A)

In general

(B)

Cross reference

(2)

Limitations

(A)

Indebtedness in excess of value

The amount excluded under subparagraph (D) of subsection (a)(1) with respect to any qualified real property business indebtedness shall not exceed the excess (if any) of—

(i)

the outstanding principal amount of such indebtedness (immediately before the discharge), over

(ii)

the fair market value of the real property described in paragraph (3)(A) (as of such time), reduced by the outstanding principal amount of any other qualified real property business indebtedness secured by such property (as of such time).

(B)

Overall limitation

(3)

Qualified real property business indebtedness

The term “qualified real property business indebtedness” means indebtedness which—

(A)

was incurred or assumed by the taxpayer in connection with real property used in a trade or business and is secured by such real property,

(B)

was incurred or assumed before January 1, 1993, or if incurred or assumed on or after such date, is qualified acquisition indebtedness, and

(C)

with respect to which such taxpayer makes an election to have this paragraph apply.

Such term shall not include qualified farm indebtedness. Indebtedness under subparagraph (B) shall include indebtedness resulting from the refinancing of indebtedness under subparagraph (B) (or this sentence), but only to the extent it does not exceed the amount of the indebtedness being refinanced.

(4)

Qualified acquisition indebtedness

(5)

Regulations

(d)

Meaning of terms; special rules relating to certain provisions

(1)

Indebtedness of taxpayer

For purposes of this section, the term “indebtedness of the taxpayer” means any indebtedness—

(A)

for which the taxpayer is liable, or

(B)

subject to which the taxpayer holds property.

(2)

Title 11 case

(3)

Insolvent

[(4)

Repealed. Pub. L. 99–514, title VIII, § 822(b)(3)(A), Oct. 22, 1986, 100 Stat. 2373]

(5)

Depreciable property

(6)

Certain provisions to be applied at partner level

(7)

Special rules for S corporation

(A)

Certain provisions to be applied at corporate level

(B)

Reduction in carryover of disallowed losses and deductions

(C)

Coordination with basis adjustments under section 1367(b)(2)

(8)

Reductions of tax attributes in title 11 cases of individuals to be made by estate

(9)

Time for making election, etc.

(A)

Time

(B)

Revocation only with consent

(C)

Manner

(10)

Cross reference

(e)

General rules for discharge of indebtedness (including discharges not in title 11 cases or insolvency)

For purposes of this title—

(1)

No other insolvency exception

(2)

Income not realized to extent of lost deductions

(3)

Adjustments for unamortized premium and discount

(4)

Acquisition of indebtedness by person related to debtor

(A)

Treated as acquisition by debtor

(B)

Members of family

(C)

Entities under common control treated as related

(5)

Purchase-money debt reduction for solvent debtor treated as price reduction

If—

(A)

the debt of a purchaser of property to the seller of such property which arose out of the purchase of such property is reduced,

(B)

such reduction does not occur—

(i)

in a title 11 case, or

(ii)

when the purchaser is insolvent, and

(C)

but for this paragraph, such reduction would be treated as income to the purchaser from the discharge of indebtedness,

then such reduction shall be treated as a purchase price adjustment.

(6)

Indebtedness contributed to capital

Except as provided in regulations, for purposes of determining income of the debtor from discharge of indebtedness, if a debtor corporation acquires its indebtedness from a shareholder as a contribution to capital—

(A)

section 118 shall not apply, but

(B)

such corporation shall be treated as having satisfied the indebtedness with an amount of money equal to the shareholder’s adjusted basis in the indebtedness.

(7)

Recapture of gain on subsequent sale of stock

(A)

In general

If a creditor acquires stock of a debtor corporation in satisfaction of such corporation’s indebtedness, for purposes of section 1245—

(i)

such stock (and any other property the basis of which is determined in whole or in part by reference to the adjusted basis of such stock) shall be treated as section 1245 property,

(ii)

the aggregate amount allowed to the creditor—

(I)

as deductions under subsection (a) or (b) of section 166 (by reason of the worthlessness or partial worthlessness of the indebtedness), or

(II)

as an ordinary loss on the exchange,

shall be treated as an amount allowed as a deduction for depreciation, and

(iii)

an exchange of such stock qualifying under section 354(a), 355(a), or 356(a) shall be treated as an exchange to which section 1245(b)(3) applies.

The amount determined under clause (ii) shall be reduced by the amount (if any) included in the creditor’s gross income on the exchange.

(B)

Special rule for cash basis taxpayers

(C)

Stock of parent corporation

(D)

Treatment of successor corporation

(E)

Partnership rule

(8)

Indebtedness satisfied by corporate stock or partnership interest

For purposes of determining income of a debtor from discharge of indebtedness, if—

(A)

a debtor corporation transfers stock, or

(B)

a debtor partnership transfers a capital or profits interest in such partnership,

to a creditor in satisfaction of its recourse or nonrecourse indebtedness, such corporation or partnership shall be treated as having satisfied the indebtedness with an amount of money equal to the fair market value of the stock or interest. In the case of any partnership, any discharge of indebtedness income recognized under this paragraph shall be included in the distributive shares of taxpayers which were the partners in the partnership immediately before such discharge.

(9)

Discharge of indebtedness income not taken into account in determining whether entity meets REIT qualifications

(10)

Indebtedness satisfied by issuance of debt instrument

(A)

In general

(B)

Issue price

(f)

Student loans

(1)

In general

(2)

Student loan

For purposes of this subsection, the term “student loan” means any loan to an individual to assist the individual in attending an educational organization described in section 170(b)(1)(A)(ii) made by—

(A)

the United States, or an instrumentality or agency thereof,

(B)

a State, territory, or possession of the United States, or the District of Columbia, or any political subdivision thereof,

(C)

a public benefit corporation—

(i)

which is exempt from taxation under section 501(c)(3),

(ii)

which has assumed control over a State, county, or municipal hospital, and

(iii)

whose employees have been deemed to be public employees under State law, or

(D)

any educational organization described in section 170(b)(1)(A)(ii) if such loan is made—

(i)

pursuant to an agreement with any entity described in subparagraph (A), (B), or (C) under which the funds from which the loan was made were provided to such educational organization, or

(ii)

pursuant to a program of such educational organization which is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or an organization described in section 501(c)(3) and exempt from tax under section 501(a).

The term “student loan” includes any loan made by an educational organization described in section 170(b)(1)(A)(ii) or by an organization exempt from tax under section 501(a) to refinance a loan to an individual to assist the individual in attending any such educational organization but only if the refinancing loan is pursuant to a program of the refinancing organization which is designed as described in subparagraph (D)(ii).

(3)

Exception for discharges on account of services performed for certain lenders

(4)

Payments under national health service corps loan repayment program and certain state loan repayment programs

(5)

Discharges on account of death or disability

(A)

In general

In the case of an individual, gross income does not include any amount which (but for this subsection) would be includible in gross income for such taxable year by reason of the discharge (in whole or in part) of any loan described in subparagraph (B), if such discharge was—

(i)

pursuant to subsection (a) or (d) of section 437 of the Higher Education Act of 1965 or the parallel benefit under part D of title IV of such Act (relating to the repayment of loan liability),

(ii)

pursuant to section 464(c)(1)(F) of such Act, or

(iii)

otherwise discharged on account of death or total and permanent disability of the student.

(B)

Loans discharged

A loan is described in this subparagraph if such loan is—

(i)

a student loan (as defined in paragraph (2)), or

(ii)

a private education loan (as defined in section 140(a) of the Consumer Credit Protection Act (15 U.S.C. 1650(a)).1

 So in original. A third closing parenthesis probably should appear.

(C)

Social security number requirement

(i)

In general

(ii)

Social security number

(g)

Special rules for discharge of qualified farm indebtedness

(1)

Discharge must be by qualified person

(A)

In general

(B)

Qualified person

(2)

Qualified farm indebtedness

For purposes of this section, indebtedness of a taxpayer shall be treated as qualified farm indebtedness if—

(A)

such indebtedness was incurred directly in connection with the operation by the taxpayer of the trade or business of farming, and

(B)

50 percent or more of the aggregate gross receipts of the taxpayer for the 3 taxable years preceding the taxable year in which the discharge of such indebtedness occurs is attributable to the trade or business of farming.

(3)

Amount excluded cannot exceed sum of tax attributes and business and investment assets

(A)

In general

The amount excluded under subparagraph (C) of subsection (a)(1) shall not exceed the sum of—

(i)

the adjusted tax attributes of the taxpayer, and

(ii)

the aggregate adjusted bases of qualified property held by the taxpayer as of the beginning of the taxable year following the taxable year in which the discharge occurs.

(B)

Adjusted tax attributes

(C)

Qualified property

(D)

Coordination with insolvency exclusion

(h)

Special rules relating to qualified principal residence indebtedness

(1)

Basis reduction

(2)

Qualified principal residence indebtedness

(3)

Exception for certain discharges not related to taxpayer’s financial condition

(4)

Ordering rule

(5)

Principal residence

(i)

Deferral and ratable inclusion of income arising from business indebtedness discharged by the reacquisition of a debt instrument

(1)

In general

At the election of the taxpayer, income from the discharge of indebtedness in connection with the reacquisition after December 31, 2008, and before January 1, 2011, of an applicable debt instrument shall be includible in gross income ratably over the 5-taxable-year period beginning with—

(A)

in the case of a reacquisition occurring in 2009, the fifth taxable year following the taxable year in which the reacquisition occurs, and

(B)

in the case of a reacquisition occurring in 2010, the fourth taxable year following the taxable year in which the reacquisition occurs.

(2)

Deferral of deduction for original issue discount in debt for debt exchanges

(A)

In general

If, as part of a reacquisition to which paragraph (1) applies, any debt instrument is issued for the applicable debt instrument being reacquired (or is treated as so issued under subsection (e)(4) and the regulations thereunder) and there is any original issue discount determined under subpart A of part V of subchapter P of this chapter with respect to the debt instrument so issued—

(i)

except as provided in clause (ii), no deduction otherwise allowable under this chapter shall be allowed to the issuer of such debt instrument with respect to the portion of such original issue discount which—

(I)

accrues before the 1st taxable year in the 5-taxable-year period in which income from the discharge of indebtedness attributable to the reacquisition of the debt instrument is includible under paragraph (1), and

(II)

does not exceed the income from the discharge of indebtedness with respect to the debt instrument being reacquired, and

(ii)

the aggregate amount of deductions disallowed under clause (i) shall be allowed as a deduction ratably over the 5-taxable-year period described in clause (i)(I).

If the amount of the original issue discount accruing before such 1st taxable year exceeds the income from the discharge of indebtedness with respect to the applicable debt instrument being reacquired, the deductions shall be disallowed in the order in which the original issue discount is accrued.

(B)

Deemed debt for debt exchanges

(3)

Applicable debt instrument

For purposes of this subsection—

(A)

Applicable debt instrument

The term “applicable debt instrument” means any debt instrument which was issued by—

(i)

a C corporation, or

(ii)

any other person in connection with the conduct of a trade or business by such person.

(B)

Debt instrument

(4)

Reacquisition

For purposes of this subsection—

(A)

In general

The term “reacquisition” means, with respect to any applicable debt instrument, any acquisition of the debt instrument by—

(i)

the debtor which issued (or is otherwise the obligor under) the debt instrument, or

(ii)

a related person to such debtor.

(B)

Acquisition

(5)

Other definitions and rules

For purposes of this subsection—

(A)

Related person

(B)

Election

(i)

In general

An election under this subsection with respect to any applicable debt instrument shall be made by including with the return of tax imposed by chapter 1 for the taxable year in which the reacquisition of the debt instrument occurs a statement which—

(I)

clearly identifies such instrument, and

(II)

includes the amount of income to which paragraph (1) applies and such other information as the Secretary may prescribe.

(ii)

Election irrevocable

(iii)

Pass-thru entities

(C)

Coordination with other exclusions

(D)

Acceleration of deferred items

(i)

In general

(ii)

Special rule for pass-thru entities

(6)

Special rule for partnerships

(7)

Secretarial authority

The Secretary may prescribe such regulations, rules, or other guidance as may be necessary or appropriate for purposes of applying this subsection, including—

(A)

extending the application of the rules of paragraph (5)(D) to other circumstances where appropriate,

(B)

requiring reporting of the election (and such other information as the Secretary may require) on returns of tax for subsequent taxable years, and

(C)

rules for the application of this subsection to partnerships, S corporations, and other pass-thru entities, including for the allocation of deferred deductions.

(Aug. 16, 1954, ch. 736, 68A Stat. 32; June 29, 1956, ch. 463, § 5, 70 Stat. 403; Pub. L. 88–496, § 1(a), June 8, 1960, 74 Stat. 164; Pub. L. 94–455, title XIX, §§ 1906(b)(13)(A), 1951(b)(2)(A), Oct. 4, 1976, 90 Stat. 1834, 1836; Pub. L. 96–589, § 2(a), Dec. 24, 1980, 94 Stat. 3389; Pub. L. 97–354, § 3(e), Oct. 19, 1982, 96 Stat. 1689; Pub. L. 97–448, title I, § 102(h)(1), title III, § 304(d), Jan. 12, 1983, 96 Stat. 2372, 2398; Pub. L. 98–369, div. A, title I, § 59(a), (b)(1), title IV, § 474(r)(5), title VII, § 721(b)(2), title X, § 1076(a), July 18, 1984, 98 Stat. 576, 839, 966, 1053; Pub. L. 99–514, title I, § 104(b)(2)

cite as: 26 USC 108