IRS grants relief for a late real-property debt exclusion election

Plain-English summary

A taxpayer held an interest in a real-estate partnership through a trust but
apparently did not receive the partnership's Schedule K-1 for the relevant
year. The taxpayer therefore did not report cancellation-of-debt income or
file Form 982 to elect the qualified real property business indebtedness
exclusion. After the taxpayer died, the personal representative obtained the
late K-1 and the return preparer discovered the omission. The IRS found that
the taxpayer acted reasonably and in good faith and granted 45 days to amend
the earlier return and make the election. The taxpayer must also reduce the
basis of depreciable real property on the following year's return as if the
election had been timely.

Ruling snapshot

• Question: May the taxpayer receive extra time to elect the qualified real property business indebtedness exclusion after a missing Schedule K-1 caused the election to be omitted?
• Outcome: Approved
• Key authorities: IRC §§ 61(a)(11) and 108(a)(1)(D), (c), and (d)(6); Treas. Reg. §§ 1.108-5(b) and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202630008
Release Date: 7/24/2026
Index Number: 9100.00-00, 108.00-00,
              108.01-00, 108.01-04,
              108.02-01

Third Party Communication: None
Date of Communication: Not Applicable

Person To Contact:
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Telephone Number/Fax Number:
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Refer Reply To:
CC:ITA:B04
PLR-118806-25

Date:
April 24, 2026

LEGEND

Taxpayer = ----------------------
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Personal Representative = -----------------------------
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Firm = --------------------------------------

CPA = ----------------------------------------

Trust = ------------------------------------------
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Partnership = -----------------------
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State = ------

Interest = ----------------------------------------------------------

Age = ----------------

PLR-118806-25
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Year 1 = -------
Year 2 = -------
Date 1 = -----------------------
Date 2 = -------------------
Date 3 = ------------------
Date 4 = ------------------
Date 5 = ------------------
Date 6 = ----------------------

Dear -------------:

This letter responds to Taxpayer’s request, dated Date 6, for a letter ruling pursuant to
§§ 301.9100-1 and 301.9100-3 of the Treasury Regulations.¹ Specifically, Taxpayer
requests an extension of time to make an election under § 108(c)(3)(C) of the Code and
§ 1.108-5(b) of the Treasury Regulations to exclude income resulting from the discharge
of qualified real property business indebtedness in Year 1 and to reduce the basis of
depreciable real property, effective in Year 2.

This letter ruling is being issued electronically in accordance with Rev. Proc. 2025-1,
2025-1 I.R.B. 1. A paper copy will not be mailed to Taxpayer.²

FACTS

Taxpayer’s gross income included income from two passthrough entities, one of which,
Partnership, engaged in rental real estate activities in State. Taxpayer held the Interest
in Partnership through Trust. On Date 2, CPA filed Taxpayer’s Year 1 Form 1040.
Taxpayer, who died on Date 3, at Age, shortly after the Year 1 Form 1040 was filed,
resided in an independent/assisted living facility. Taxpayer’s spouse died on Date 1.
Taxpayer was not conversant with issues related to federal or state income taxation,
and Taxpayer and Taxpayer’s late spouse relied on CPA in all matters related to taxes.

¹ Unless otherwise specified, all “section” or “§” references are to sections of the Internal Revenue Code
of 1986, as amended (Code), Title 26 U.S.C., or the Treasury Regulations (Treas. Reg.), Title 26 C.F.R.
pt. 1 (Income Tax), or Title 26 C.F.R. pt. 301 (Procedure and Administration).
² References to Taxpayer in this letter ruling mean either the deceased Taxpayer or Personal
Representative depending on the context, i.e., before or after Taxpayer’s death.

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3

Once a year, with the help of an assistant, Taxpayer delivered to CPA the tax forms
collected from Taxpayer’s home. Taxpayer never received a dividend or other
distribution from Partnership, and it does not appear that Taxpayer received a Schedule
K-1 (K-1) from Partnership in Year 1 or any other year since the death of Taxpayer’s
spouse. As Taxpayer did not receive a Year 1 K-1 from Partnership, Taxpayer did not
file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and
Section 1082 Basis Adjustment), to make an elect to exclude the discharged qualified
real property business indebtedness reported on the K-1 from gross income in Year 1.

Following Taxpayer’s death, Personal Representative was appointed as Taxpayer’s
personal representative, and Firm was hired to prepare Taxpayer’s Year 2 individual
and estate tax returns. Taxpayer requested information from Partnership in connection
with the preparation of the estate return. On Date 4, Taxpayer received K-1’s for Year 1
and Year 2 and promptly forward the K-1’s to Firm. On Date 5, Firm discovered that
cancellation of debt income was not reported on Taxpayer’s Year 1 Form 1040.

LAW AND ANALYSIS

Section 61(a) of the Code provides, in part, that except as otherwise provided in this
subtitle, gross income means all income from whatever source derived. The statute then
specifically lists income from discharge of indebtedness as one of the items within the
scope of the term income. See § 61(a)(11).

Section 108(a)(1)(D) provides that gross income does not include any amount that (but
for § 108(a)) would be includible in gross income by reason of the discharge of
indebtedness if, in the case of a taxpayer other than a C corporation, the indebtedness
discharged is qualified real property business indebtedness.

Section 108(c)(1) provides that the amount excluded from gross income under
§ 108(a)(1)(D) shall be applied to reduce the basis of the depreciable real property of
the taxpayer.

Section 108(c)(2)(A) provides, in general, that the amount excluded under
§ 108(a)(1)(D) with respect to any qualified real property business indebtedness shall
not exceed the excess of the outstanding principal amount of such indebtedness
(immediately before the discharge) over the fair market value of the real property
described in § 108(c)(3)(A) (as of such time).

Section 108(c)(3)(C) requires a taxpayer to make an election to exclude qualified real
property business indebtedness.

Section 108(d)(6) provides that in the case of a partnership, § 108(a) and § 108(c) are
applied at the partner level.

PLR-118806-25
4

Section 1.108-5(b) provides that the election must be made on the timely-filed (including
extensions) Federal income tax return for the taxable year in which the taxpayer has
discharge of indebtedness income that is excludible from gross income under section
108(a). The election is to be made on a completed Form 982, Reduction of Tax
Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).

Section 301.9100-1(b) defines the term “regulatory election as including any election
whose due date is prescribed by a regulation published in the Federal Register. Treas.
Reg. § 1.108-5 sets forth the manner and timing for electing to exclude qualified real
property business indebtedness. Therefore, these elections are regulatory elections.

Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will
use to determine whether to grant an extension of time to make a regulatory election.
Section 301.9100-3(a) provides that requests for extensions of time for regulatory
elections (other than automatic changes covered in § 301.9100-2) will be granted when
the taxpayer provides evidence (including affidavits) to establish that the taxpayer acted
reasonably and in good faith and granting relief will not prejudice the interests of the
Government.

Section 301.9100-3(b)(1) provides that a taxpayer is deemed to have acted reasonably
and in good faith if the taxpayer—

(i) requests relief before the failure to make the regulatory election is discovered by the
Service;

(ii) failed to make the election because of intervening events beyond the taxpayer's
control;

(iii) failed to make the election because, after exercising reasonable diligence, the
taxpayer was unaware of the necessity for the election;

(iv) reasonably relied on the written advice of the Service; or

(v) reasonably relied on a qualified tax professional, and the professional failed to make,
or advise the taxpayer to make, the election.

Section 301.9100-3(b)(3) provides that a taxpayer is deemed not to have acted
reasonably and in good faith if the taxpayer—

(i) seeks to alter a return position for which an accuracy-related penalty has been or
could be imposed under § 6662 at the time the taxpayer requests relief, and the new
position requires or permits a regulatory election for which relief is requested;

(ii) was fully informed in all material respects of the required election and related tax
consequences but chose not to make the election; or

PLR-118806-25
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(iii) uses hindsight in requesting relief. If specific facts have changed since the original
deadline that make the election advantageous to a taxpayer, the Service will not
ordinarily grant relief.

Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable
extension of time to make the regulatory election only when the interests of the
Government will not be prejudiced by the granting of relief.

Section 301.9100-3(c)(1)(i) provides that the interests of the Government will be
prejudiced if granting relief would result in a taxpayer having a lower tax liability in the
aggregate for all taxable years affected by the election than the taxpayer would have
had if the election had been timely made (taking into account the time value of money).

Section 301.9100-3(c)(1)(ii) provides that the interests of the government are ordinarily
prejudiced if the taxable year in which the regulatory election should have been made or
any taxable year that would have been affected by the election had it been timely made
are closed by the period of limitations on assessment under section 6501(a) before the
taxpayer's receipt of a ruling granting relief under this section.

Under the facts submitted by Taxpayer, we conclude that Taxpayer has acted
reasonably and in good faith and that the granting of relief will not prejudice the interests
of the Government.

CONCLUSION

Accordingly, based solely on the facts and information submitted and the
representations made in the ruling request, we grant Taxpayer an extension of 45 days
from the date of this letter to file an amended return for Year 1 to make an election
under § 108(c)(3)(C) and Treas. Reg. § 1-108-5(b). The election shall be made on Form

982. As required by § 108(c)(1) in making this election, Taxpayer will reduce basis in
depreciable real property on Taxpayer’s Year 2 tax return to the extent that would have
been required if a timely election had been made on Taxpayer’s Year 1 return.

CAVEATS

Except as provided herein, no opinion is expressed or implied concerning the tax
consequences of any aspect of any transaction or item discussed or referenced in this
letter. Specifically, this letter does not rule on whether the amount of income at issue is
properly treated as cancellation of debt income under § 61a)(11) or whether the income
qualifies for exclusion from income under § 108.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that
it may not be used or cited as precedent.

A copy of this letter must be attached to any income tax return to which it is relevant.

PLR-118806-25
6

Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

In accordance with the power of attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

Sincerely,

Mon L. Lam
Senior Counsel, Branch 4
Office of Associate Chief Counsel
(Income Tax & Accounting)

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