No Income Realized for Deductible Liabilities

§ 108. Income from discharge of indebtedness(a) Exclusion from gross income(1) In generalGross 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 precedenceSubparagraphs (B), (C), (D), and (E) of paragraph (1) shall not apply to a discharge which occurs in a title 11 case. (B) Insolvency exclusion takes precedence over qualified farm exclusion and qualified real property business exclusionSubparagraphs (C) and (D) of paragraph (1) shall not apply to a discharge to the extent the taxpayer is insolvent. (C) Principal residence exclusion takes precedence over insolvency exclusion unless elected otherwiseParagraph (1)(B) shall not apply to a discharge to which paragraph (1)(E) applies unless the taxpayer elects to apply paragraph (1)(B) in lieu of paragraph (1)(E). (3) Insolvency exclusion limited to amount of insolvencyIn the case of a discharge to which paragraph (1)(B) applies, the amount excluded under paragraph (1)(B) shall not exceed the amount by which the taxpayer is insolvent. (b) Reduction of tax attributes(1) In generalThe amount excluded from gross income under subparagraph (A), (B), or (C) of subsection (a)(1) shall be applied to reduce the tax attributes of the taxpayer as provided in paragraph (2). (2) Tax attributes affected; order of reductionExcept 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) NOLAny net operating loss for the taxable year of the discharge, and any net operating loss carryover to such taxable year. (B) General business creditAny carryover to or from the taxable year of a discharge of an amount for purposes for determining the amount allowable as a credit under section 38 (relating to general business credit). (C) Minimum tax creditThe amount of the minimum tax credit available under section 53(b) as of the beginning of the taxable year immediately following the taxable year of the discharge. (D) Capital loss carryoversAny net capital loss for the taxable year of the discharge, and any capital loss carryover to such taxable year under section 1212. (E) Basis reduction(i) In generalThe basis of the property of the taxpayer.