---
kind: "section"
citation: "26 U.S.C. § 1017"
title: "26"
title_heading: "Internal Revenue Code"
number: "1017"
heading: "Discharge of indebtedness"
release: "119-102"
date: "2026-07-12"
url: "https://uscodex.org/usc/26/1017"
units:
  - "Subtitle A — Income Taxes"
  - "Chapter 1 — Normal Taxes and Surtaxes"
  - "Subchapter O — Gain or Loss on Disposition of Property"
  - "Part II — Basis Rules of General Application"
---

# §1017. Discharge of indebtedness

- (a) **General rule—** If—
  - (1) an amount is excluded from gross income under [subsection (a)](/usc/26/108.md?p=a) of section 108 (relating to discharge of indebtedness), and
  - (2) under subsection [(b)(2)(E)](/usc/26/108.md?p=b-2-E), [(b)(5)](/usc/26/108.md?p=b-5), or [(c)(1)](/usc/26/108.md?p=c-1) of section 108, any portion of such amount is to be applied to reduce basis,

  then such portion shall be applied in reduction of the basis of any [property](/usc/26/317.md?p=a) held by the [taxpayer](/usc/26/1313.md?p=b) at the beginning of the taxable year following the taxable year in which the discharge occurs.

- (b) **Amount and properties determined under regulations—**
  - (1) **In general—** The amount of reduction to be applied under [subsection (a)](#a) (not in excess of the portion referred to in [subsection (a)](#a)), and the particular [properties](/usc/26/317.md?p=a) the bases of which are to be reduced, shall be determined under regulations prescribed by the Secretary.
  - (2) **Limitation in title 11 case or insolvency—** In the case of a discharge to which subparagraph [(A)](/usc/26/108.md?p=a-1-A) or [(B)](/usc/26/108.md?p=a-1-B) of section 108(a)(1) applies, the reduction in basis under [subsection (a)](#a) of this section shall not exceed the excess of—
    - (A) the aggregate of the bases of the [property](/usc/26/317.md?p=a) held by the [taxpayer](/usc/26/1313.md?p=b) immediately after the discharge, over
    - (B) the aggregate of the liabilities of the [taxpayer](/usc/26/1313.md?p=b) immediately after the discharge.

    The preceding sentence shall not apply to any reduction in basis by reason of an election under [section 108(b)(5)](/usc/26/108.md?p=b-5).

  - (3) **Certain reductions may only be made in the basis of depreciable property—**
    - (A) **In general—** Any amount which under subsection [(b)(5)](/usc/26/108.md?p=b-5) or [(c)(1)](/usc/26/108.md?p=c-1) of section 108 is to be applied to reduce basis shall be applied only to reduce the basis of depreciable [property](/usc/26/317.md?p=a) held by the [taxpayer](/usc/26/1313.md?p=b).
    - (B) **Depreciable property—** For purposes of this section, the term “depreciable [property](/usc/26/317.md?p=a)” means any [property](/usc/26/317.md?p=a) of a character subject to the allowance for depreciation, but only if a basis reduction under [subsection (a)](#a) will reduce the amount of depreciation or amortization which otherwise would be allowable for the period immediately following such reduction.
    - (C) **Special rule for partnership interests—** For purposes of this section, any [interest](/usc/26/856.md?p=f-1) of a [partner](/usc/26/761.md?p=b) in a [partnership](/usc/26/761.md?p=a) shall be treated as depreciable [property](/usc/26/317.md?p=a) to the extent of such [partner](/usc/26/761.md?p=b)’s proportionate [interest](/usc/26/856.md?p=f-1) in the depreciable [property](/usc/26/317.md?p=a) held by such [partnership](/usc/26/761.md?p=a). The preceding sentence shall apply only if there is a corresponding reduction in the [partnership](/usc/26/761.md?p=a)’s basis in depreciable [property](/usc/26/317.md?p=a) with respect to such [partner](/usc/26/761.md?p=b).
    - (D) **Special rule in case of affiliated group—** For purposes of this section, if—
      - (i) a corporation holds [stock](/usc/26/1504.md?p=a-4) in another corporation (hereinafter in this subparagraph referred to as the “subsidiary”), and
      - (ii) such corporations are members of the same [affiliated group](/usc/26/864.md?p=e-5-A) which file a consolidated return under [section 1501](/usc/26/1501.md) for the taxable year in which the discharge occurs,

      then such [stock](/usc/26/1504.md?p=a-4) shall be treated as depreciable [property](/usc/26/317.md?p=a) to the extent that such subsidiary consents to a corresponding reduction in the basis of its depreciable [property](/usc/26/317.md?p=a).

    - (E) **Election to treat certain inventory as depreciable property—**
      - (i) **In general—** At the election of the [taxpayer](/usc/26/1313.md?p=b), for purposes of this section, the term “depreciable [property](/usc/26/317.md?p=a)” includes any real [property](/usc/26/317.md?p=a) which is described in [section 1221(a)(1)](/usc/26/1221.md?p=a-1).
      - (ii) **Election—** An election under [clause (i)](#b-3-E-i) shall be made on the [taxpayer](/usc/26/1313.md?p=b)’s return for the taxable year in which the discharge occurs or at such other time as may be permitted in regulations prescribed by the Secretary. Such an election, once made, may be revoked only with the consent of the Secretary.
    - (F) **Special rules for qualified real property business indebtedness—** In the case of any amount which under [section 108(c)(1)](/usc/26/108.md?p=c-1) is to be applied to reduce basis—
      - (i) depreciable [property](/usc/26/317.md?p=a) shall only include depreciable real [property](/usc/26/317.md?p=a) for purposes of subparagraphs [(A)](#b-3-A) and [(C)](#b-3-C),
      - (ii) [subparagraph (E)](#b-3-E) shall not apply, and
      - (iii) in the case of [property](/usc/26/317.md?p=a) taken into account under [section 108(c)(2)(B)](/usc/26/108.md?p=c-2-B), the reduction with respect to such [property](/usc/26/317.md?p=a) shall be made as of the time immediately before [disposition](/usc/26/424.md?p=c-1) if earlier than the time under [subsection (a)](#a).
  - (4) **Special rules for qualified farm indebtedness—**
    - (A) **In general—** Any amount which under [subsection (b)(2)(E)](/usc/26/108.md?p=b-2-E) of section 108 is to be applied to reduce basis and which is attributable to an amount excluded under [subsection (a)(1)(C)](/usc/26/108.md?p=a-1-C) of section 108—
      - (i) shall be applied only to reduce the basis of qualified [property](/usc/26/317.md?p=a) held by the [taxpayer](/usc/26/1313.md?p=b), and
      - (ii) shall be applied to reduce the basis of qualified [property](/usc/26/317.md?p=a) in the following order:
        - (I) First the basis of qualified [property](/usc/26/317.md?p=a) which is depreciable [property](/usc/26/317.md?p=a).
        - (II) Second the basis of qualified [property](/usc/26/317.md?p=a) which is land used or held for use in the [trade or business](/usc/26/1402.md?p=c) of farming.
        - (III) Then the basis of other qualified [property](/usc/26/317.md?p=a).
    - (B) **Qualified property—** For purposes of this paragraph, the term “qualified [property](/usc/26/317.md?p=a)” has the meaning given to such term by [section 108(g)(3)(C)](/usc/26/108.md?p=g-3-C).
    - (C) **Certain rules made applicable—** Rules similar to the rules of subparagraphs [(C)](#b-3-C), [(D)](#b-3-D), and [(E)](#b-3-E) of paragraph (3) shall apply for purposes of this paragraph and [section 108(g)](/usc/26/108.md?p=g).
- (c) **Special rules—**
  - (1) **Reduction not to be made in exempt property—** In the case of an amount excluded from gross income under [section 108(a)(1)(A)](/usc/26/108.md?p=a-1-A), no reduction in basis shall be made under this section in the basis of [property](/usc/26/317.md?p=a) which the debtor treats as exempt [property](/usc/26/317.md?p=a) under [section 522 of title 11](/usc/11/522.md) of the United States Code.
  - (2) **Reductions in basis not treated as dispositions—** For purposes of this title, a reduction in basis under this section shall not be treated as a [disposition](/usc/26/424.md?p=c-1).
- (d) **Recapture of reductions—**
  - (1) **In general—** For purposes of sections [1245](/usc/26/1245.md) and [1250](/usc/26/1250.md)—
    - (A) any [property](/usc/26/317.md?p=a) the basis of which is reduced under this section and which is neither [section 1245](/usc/26/1245.md) [property](/usc/26/317.md?p=a) nor [section 1250](/usc/26/1250.md) [property](/usc/26/317.md?p=a) shall be treated as [section 1245](/usc/26/1245.md) [property](/usc/26/317.md?p=a), and
    - (B) any reduction under this section shall be treated as a deduction allowed for depreciation.
  - (2) **Special rule for section 1250—** For purposes of [section 1250(b)](/usc/26/1250.md?p=b), the [determination](/usc/26/1313.md?p=a) of what would have been the depreciation adjustments under the straight line method shall be made as if there had been no reduction under this section.

## Source credit

(Aug. 16, 1954, ch. 736, 68A Stat. 301; Pub. L. 94–455, title XIX, §§ 1906(b)(13)(A), 1951(c)(1), Oct. 4, 1976, 90 Stat. 1834, 1840; Pub. L. 96–589, § 2(b), Dec. 24, 1980, 94 Stat. 3394; Pub. L. 99–514, title IV, § 405(b), title VIII, § 822(b)(4), (5), Oct. 22, 1986, 100 Stat. 2224, 2373; Pub. L. 100–647, title I, § 1004(a)(5), Nov. 10, 1988, 102 Stat. 3386; Pub. L. 101–508, title XI, § 11704(a)(12), Nov. 5, 1990, 104 Stat. 1388–518; Pub. L. 103–66, title XIII, § 13150(c)(6)–(8), Aug. 10, 1993, 107 Stat. 448; Pub. L. 104–188, title I, § 1703(n)(5), Aug. 20, 1996, 110 Stat. 1877; Pub. L. 105–206, title VI, § 6023(11), July 22, 1998, 112 Stat. 825; Pub. L. 106–170, title V, § 532(c)(2)(S), Dec. 17, 1999, 113 Stat. 1931.)

## Notes

### Editorial Notes

### Amendments

1999—Subsec. (b)(3)(E)(i). Pub. L. 106–170 substituted “1221(a)(1)” for “1221(1)”.

1998—Subsec. (a)(2). Pub. L. 105–206 substituted “(b)(2)(E)” for “(b)(2)(D)”.

1996—Subsec. (b)(4)(A). Pub. L. 104–188 substituted “subsection (b)(2)(E)” for “subsection (b)(2)(D)”.

1993—Subsec. (a)(2). Pub. L. 103–66, § 13150(c)(6), substituted “, (b)(5), or (c)(1)” for “or (b)(5)”.

Subsec. (b)(3)(A). Pub. L. 103–66, § 13150(c)(7), inserted “or (c)(1)” after “subsection (b)(5)”.

Subsec. (b)(3)(F). Pub. L. 103–66, § 13150(c)(8), added subpar. (F).

1990—Subsec. (b)(4)(C). Pub. L. 101–508 substituted “subparagraphs” for “subparagraph”.

1988—Subsec. (b)(4). Pub. L. 100–647 substituted “Special rules for” for “Ordering rule in the case of” in heading, and amended text generally. Prior to amendment, text read as follows: “Any amount which is excluded from gross income under section 108(a) by reason of the discharge of qualified farm indebtedness (within the meaning of section 108(g)(2)) and which under subsection (b) of section 108 is to be applied to reduce basis shall be applied—

“(A) first to reduce the tax attributes described in section 108(b)(2) (other than subparagraph (D) thereof),

“(B) then to reduce basis of property other than property described in subparagraph (C), and

“(C) then to reduce the basis of land used or held for use in the trade or business of farming.”

1986—Subsec. (a)(2). Pub. L. 99–514, § 822(b)(4), substituted “or (b)(5)” for “, (b)(5), or (c)(1)(A)”.

Subsec. (b)(3)(A). Pub. L. 99–514, § 822(b)(5), struck out “or (c)(1)(A)” after “subsection (b)(5)”.

Subsec. (b)(4). Pub. L. 99–514, § 405(b), added par. (4).

1980—Pub. L. 96–589 generally revised and expanded the section to specify the amount of reduction of basis of property under different subsections of section 108 of this title and the property to which such reduction is applicable, and provided for recapture of reductions for purposes of gains from depreciable property.

1976—Pub. L. 94–455, §§ 1906(b)(13)(A), 1951(c)(1), substituted “section 108” for “section 108(a)” in three places and struck out “or his delegate” after “Secretary”.

### Statutory Notes and Related Subsidiaries

### Effective Date of 1999 Amendment

Amendment by Pub. L. 106–170 applicable to any instrument held, acquired, or entered into, any transaction entered into, and supplies held or acquired on or after Dec. 17, 1999, see section 532(d) of Pub. L. 106–170, set out as a note under section 170 of this title.

### Effective Date of 1996 Amendment

Amendment by Pub. L. 104–188 effective as if included in the provision of the Revenue Reconciliation Act of 1993, Pub. L. 103–66, §§ 13001–13444, to which such amendment relates, see section 1703(o) of Pub. L. 104–188, set out as a note under section 39 of this title.

### Effective Date of 1993 Amendment

Amendment by Pub. L. 103–66 applicable to discharges after Dec. 31, 1992, in taxable years ending after such date, see section 13150(d) of Pub. L. 103–66, set out as a note under section 108 of this title.

### Effective Date of 1988 Amendment

Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.

### Effective Date of 1986 Amendment

Amendment by section 405(b) of Pub. L. 99–514 applicable to discharges of indebtedness occurring after Apr. 9, 1986, in taxable years ending after such date, see section 405(c) of Pub. L. 99–514, set out as a note under section 108 of this title.

Amendment by section 822(b)(4), (5) of Pub. L. 99–514 applicable to discharges after Dec. 31, 1986, see section 822(c) of Pub. L. 99–514, set out as a note under section 108 of this title.

### Effective Date of 1980 Amendment

Amendment by Pub. L. 96–589 applicable to transactions which occur after Dec. 31, 1980, other than transactions which occur in a proceeding in a bankruptcy case or similar judicial proceeding or in a proceeding under Title 11 commencing on or after Dec. 31, 1980, with an exception permitting the debtor to make the amendment applicable to transactions occurring after Sept. 30, 1979 in a specified manner, see section 7(a) and (f) of Pub. L. 96–589, set out as a note under section 108 of this title.