A foreclosure, short sale, or deed in lieu can create taxes in two ways: gain on the home's disposal and canceled debt income if the lender forgives what you still owe. The mortgage forgiveness exclusion generally ended for debt canceled after 2025, but insolvency or bankruptcy may still exclude it.
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After losing a home or selling it short, a tax form in the mail can feel like one more blow. Many people end up owing less than they fear, but it is worth getting the details right, and a tax professional can help.
It can. The IRS treats a foreclosure, short sale, or deed in lieu as a disposal of your home. That can lead to two separate tax questions:
A loss on your personal home generally is not deductible. A gain may be tax-free under the home sale exclusion if you meet the ownership and use tests. The details depend on whether your loan was recourse or non-recourse, explained below. This page is general information, not tax advice. Talk to a tax professional about your situation.
| Form 1099-A | Form 1099-C | |
|---|---|---|
| What it reports | The lender acquired the property or knows it was abandoned | The lender canceled a debt of $600 or more |
| Key boxes | Balance owed, fair market value, and whether you were personally liable | Amount of debt canceled, plus property details if it replaces a 1099-A |
| Used to figure | Gain or loss on the home | Possible canceled debt income |
| Can you get both? | Yes, if the lender also cancels debt | If both happen in the same year, the lender may send only a 1099-C that includes the 1099-A details |
Check the forms closely. If the balance, fair market value, or personal liability box looks wrong, ask the lender to correct it. A 1099-C does not always mean you owe tax on the full amount. It only reports that an event happened.
The IRS rules in Publication 4681 turn on whether you were personally liable for the loan.
Box 5 on Form 1099-A shows whether the lender says you were personally liable. Whether a loan is recourse depends on your loan documents and state law, so ask your tax professional to confirm it.
Generally, no, for new forgiveness. The Qualified Principal Residence Indebtedness (QPRI) exclusion let homeowners exclude forgiven debt on their main home. Under current federal law (26 U.S.C. §108(a)(1)(E)), it applies only to debt discharged before January 1, 2026, or discharged under a written arrangement entered into before that date. The IRS states in Publication 4681 that QPRI cannot be excluded for discharges completed or agreements entered into after December 31, 2025, and the National Consumer Law Center reports it expired on January 1, 2026.
What this means for you:
Congress has extended this break many times before, sometimes after it lapsed. As of September 2026, the tax code still limits it to discharges before 2026, and a bill to make it permanent (H.R. 917) had not passed. Ask a tax professional to check the current law before you file.
Often, yes. You do not have to include canceled debt in income to the extent you were insolvent right before it was canceled. You are insolvent when your total debts are more than the fair market value of everything you own, including retirement accounts.
For example, if you were $20,000 insolvent and $30,000 was forgiven, you could exclude $20,000, and $10,000 would generally be taxable. IRS Publication 4681 has an insolvency worksheet. You claim the exclusion on Form 982, filed with your return.
Debt canceled in a Title 11 bankruptcy case is also not included in income, and it is also reported on Form 982. See how bankruptcy stops foreclosure for how bankruptcy fits in.
Generally, the same federal rules apply to all three. Each is treated as a disposal of the home, and any forgiven debt may be canceled debt income. The main differences are practical:
Compare the non-tax effects in short sale vs. foreclosure. Selling on your own before a sale, including to a direct cash buyer, may avoid canceled debt entirely if the price covers what you owe. State income tax rules can differ from federal rules.
Sources (checked 2026-09-26):
It can be. The IRS treats it as a disposal of your home, so you may have a gain, and any debt the lender forgives may be taxable canceled debt income. Exclusions like insolvency or bankruptcy may reduce or remove the tax. Talk to a tax professional.
Not always. The 1099-C reports forgiven debt, but you may exclude it if you were insolvent, if it was discharged in bankruptcy, or if it was non-recourse debt. Mortgage forgiveness on a main home from 2025 or earlier, or under a written agreement made before 2026, may also qualify for the QPRI exclusion.
You may still have to report canceled debt if a debt was forgiven. Lenders only have to send a 1099-C when $600 or more is canceled. Ask the lender whether it canceled the debt and when, and share the answer with your tax professional.
Generally not for new forgiveness. Under current law, the principal residence exclusion covers debt discharged before January 1, 2026, or under a written arrangement made before then. Insolvency and bankruptcy exclusions still apply, and Congress could act again, so check with a tax professional.
Generally no. A loss on the disposal of your personal home is not deductible. A loss on a rental or investment property may be treated differently, so ask a tax professional.
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