In a year where real estate values are increasing, cancellation of debt on real property is not typically an issue or on the mind of many owners. Real estate, of course, does have its downturns and in unfortunate circumstances, a company may need to go through a debt workout agreement. This can lead to the company receiving an IRS Form 1099-C, which can potentially lead to the debt forgiveness being included in gross income. However, there is an exclusion of income rule under Internal Revenue Code Section 108(c) that allows the taxpayer to avoid recognizing this income by reducing the taxpayer’s basis in the depreciable real property. There are several steps that must be followed and limitations that must be addressed in order to properly exclude the income in the year of workout. The first step under Section 108(c)(3) is ensuring the indebtedness 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. Next, the taxpayer will need to address the limitations. There is an equity limitation where equity cannot be created in the property from having too much cancelled debt. The amount excluded cannot exceed the outstanding principal immediately before the discharge over the net fair market value of the qualifying real property immediately before the discharge.