Will I owe taxes after a foreclosure or short sale?

How does the IRS see a foreclosure?

The IRS treats a foreclosure, a short sale, or a deed in lieu much like selling your home. You may have a gain or a loss on the sale. If it was your main home, you may be able to leave out up to 250,000 dollars of gain, or 500,000 dollars for a married couple filing together, if you meet the rules.

Is forgiven mortgage debt taxable?

Often, yes. Forgiven debt is called canceled debt, and it is usually counted as income. For years, a special federal rule let homeowners leave out forgiven debt on their main home. That rule ended for debt forgiven after December 31, 2025, unless you had a written agreement before January 1, 2026. A bill in Congress, H.R. 917, would bring it back, but it had not passed as of October 2026.

Does California tax forgiven mortgage debt?

It can. California does not follow the federal break for forgiven home loan debt today. So forgiven debt may count as income on your California return, even in years when the federal rule applied.

What exceptions can help?

• Insolvency. If your debts were more than everything you owned right before the debt was forgiven, you may be able to leave out some or all of it. Both the IRS and California allow this.
• Bankruptcy. Debt forgiven in a bankruptcy case is generally not taxable.
• Nonrecourse loans. If the lender could only take the home and could not come after you personally, forgiven debt is generally not counted as canceled debt income. It is treated as part of the sale instead.

What tax forms will I get?

You may get Form 1099-A, which reports that the lender took the home, and Form 1099-C, which reports canceled debt. Check both for mistakes. If an exception applies, you usually claim it on IRS Form 982.

Is tax taken out of a short sale in California?

California often requires 3 and one third percent of the sale price to be withheld for state taxes when real estate is sold. Sales of your main home and sales at a loss can qualify for an exemption on Form 593. Foreclosures and deeds in lieu are exempt. Ask your escrow company about this early.

Who can help me with my taxes?

A tax professional can look at your situation. Free help is available through the IRS Volunteer Income Tax Assistance program at 800-906-9887. The IRS explains canceled debt in Publication 4681.