Is a foreclosure taxable?

Foreclosure is a sale for tax purposes

When you stop paying a secured loan, the lender may foreclose or repossess. The publication treats that as a sale or exchange, and says the same is true if you hand the property back voluntarily. You figure gain or loss exactly as for any sale: the difference between your adjusted basis in the transferred property and the amount realized. A transfer of property to satisfy a debt is an exchange under the publication’s general rules. The lender’s side, for someone who financed a buyer and takes the property back, is covered in Pub. 537.

Nonrecourse debt: the full balance counts

If you are not personally liable for the debt, the amount you realize includes the full debt canceled by the transfer, even when the property is worth less than the debt. The publication’s car example: a car bought for $15,000 with a $13,000 nonrecourse loan is repossessed when the balance is $10,000 and the car is worth $9,000. The amount realized is $10,000, compared with the $15,000 basis, for a $5,000 nondeductible loss. Its house example: a basis of $175,000 and a canceled balance of $180,000 produce a $5,000 realized gain, even though the home was worth $170,000.

Recourse debt: two separate pieces

If you are personally liable, the amount realized is the lesser of the outstanding debt (reduced by any amount you remain liable for after the transfer) or the fair market value of the property. Any debt canceled beyond the value is treated as ordinary income from cancellation of debt, separate from gain or loss. The same car with recourse debt has an amount realized of $9,000, a $6,000 nondeductible loss, and $1,000 of cancellation income. The house with recourse debt has an amount realized of $170,000, a $5,000 nondeductible loss, and $10,000 of ordinary income. Enter these figures above and the tool reproduces them.

Does the canceled debt have to be taxed?

Not always. The publication lists exceptions to reporting canceled debt as income: the cancellation is intended as a gift, the debt is qualified farm debt or qualified real property business debt, you are insolvent or bankrupt, or it is qualified principal residence indebtedness. You claim an exclusion on Form 982. Income from canceled debt tied to a business or rental activity is reported as business or rental income. The exclusion applies to the debt cancellation income, not to the separate gain or loss on the property itself.

Main home and personal-use property

A loss on a personal-use asset such as a car or your home is not deductible, as both of the publication’s examples show. For a gain on a sale of your main home, the publication says you may be able to exclude all or part of it if you owned and lived there at least 2 years of the 5-year period ending on the sale date, subject to a nonqualified-use limit, and points to Pub. 523. It does not separately walk through that exclusion for a foreclosure, so confirm how it applies to yours. Business and rental property follow business rules, including depreciation recapture where it applies, so the adjusted basis you use must reflect the depreciation allowed or allowable.

The worksheet and the forms you will get

Table 1-2 puts the steps in order. Part 1, only for recourse debt, finds the cancellation income: outstanding debt minus fair market value, not below zero. Part 2 starts with the smaller of debt or fair market value for recourse debt (the full debt for nonrecourse), adds foreclosure sale proceeds, subtracts adjusted basis, and gives gain or loss. The lender should send Form 1099-A with what you need, or Form 1099-C if it also cancels debt of $600 or more. For foreclosures or repossessions in 2025, those forms should be sent by February 2, 2026. Compare the figures with your own records.

Mistakes to avoid

People assume foreclosure means no tax, treat the lender’s Form 1099-C amount as the gain, skip the recourse test, or ignore basis adjustments such as improvements and depreciation. Another is reporting canceled debt as income when an insolvency or principal-residence exclusion applies, without filing Form 982. Whether your loan is recourse depends on its terms and the law that governs it, so settle that with the loan documents or a professional before you file. This page explains the federal rule and is not advice on your situation.

Related Publication 544 topics

More from the same IRS publication: Can you deduct an abandonment loss?, What is an involuntary conversion?, Is gain on a capital asset sale taxable?. Related tools on this site: home sale capital gain exclusion calculator, standard vs itemized deduction calculator.

Sources

• IRS Publication 544, Sales and Other Dispositions of Assets (2025): sections “Foreclosures and Repossessions”, “Amount realized on a nonrecourse debt”, “Amount realized on a recourse debt”, “Table 1-2”, “Cancellation of debt”. Read November 2, 2026.

Edition read: Publication 544 (2025), for use in preparing 2025 returns. Dollar limits and rates in this publication are for 2025; the publication notes that later legislation (P.L. 119-21) may affect federal rules, so check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it. Marked for human review.