26 U.S.C. § 1017 — Discharge of indebtedness

(a) General rule. If an amount is excluded from gross income under section 108(a), and section 108(b)(2)(E), (b)(5), or (c)(1) requires part of it to reduce basis, apply that part to property the taxpayer^* holds at the beginning of the tax year after the discharge.

(b) Regulations and limits. (1) The Secretary’s regulations determine the reduction amount and the properties affected. (2) In a title 11 or insolvency case under section 108(a)(1)(A) or (B), the reduction cannot exceed the taxpayer’s property bases immediately after discharge minus the taxpayer’s liabilities then. This limit does not apply to a reduction elected under section 108(b)(5). (3)(A) Amounts under section 108(b)(5) or (c)(1) may reduce only depreciable property. (B) “Depreciable property” means property eligible for depreciation, but only when the reduction lowers later depreciation or amortization. This section does not define the term further. (C) A partner’s partnership^* interest is depreciable property to the extent of the partner’s proportional interest in the partnership’s depreciable property, only if the partnership correspondingly reduces that property’s basis. (D) Stock^* of a subsidiary in the same affiliated group filing a consolidated return is depreciable property to the extent the subsidiary agrees to a corresponding reduction in its depreciable property. (E)(i) At the taxpayer’s election, depreciable property also includes real property^* described in section 1221(a)(1). (ii) Make the election on the discharge-year return or as regulations allow; revoke it only with the Secretary’s consent. (F) For section 108(c)(1) amounts, depreciable property means only depreciable real property for subparagraphs (A) and (C); subparagraph (E) does not apply; and property under section 108(c)(2)(B) is reduced immediately before an earlier disposition. (4)(A) For qualified farm indebtedness excluded under section 108(a)(1)(C), reduce only qualified property, in this order: depreciable qualified property, farmland used or held for farming, then other qualified property. (B) “Qualified property” has the meaning in section 108(g)(3)(C). (C) Similar rules from paragraph (3)(C)–(E) apply.

(c) Special rules. (1) For section 108(a)(1)(A) exclusions, do not reduce the basis of property the debtor treats as exempt under title 11, section 522. (2) A basis reduction under this section is not a disposition.

(d) Recapture. (1) For sections 1245 and 1250, reduced-basis property that is neither section 1245 nor 1250 property is treated as section 1245 property, and every reduction is treated as depreciation allowed. (2) For section 1250(b), calculate the straight-line depreciation adjustments as if there had been no reduction.