The exclusion expired at the end of 2025
From 2007 through 2025 up to $750,000 of forgiven mortgage debt could be left off a federal return. Congress did not renew it.
Colorado homeowners
In most cases now, yes. The federal rule that made forgiven mortgage debt tax-free on a primary residence expired on December 31, 2025. Insolvency is the exception that covers most underwater sellers.
A live person answers, not a robot and not a phone tree.
From 2007 through 2025 up to $750,000 of forgiven mortgage debt could be left off a federal return. Congress did not renew it.
Your lender reports the forgiven amount to you and the IRS, usually in January. Whether it becomes taxable income depends on which exceptions you qualify for.
If your debts exceeded the value of everything you owned just before the discharge, the forgiven amount is excluded up to that shortfall.
We are brokers, not tax professionals. Anyone who tells you what you will owe is guessing. Bring your approval letter and your numbers to a CPA.
Colorado homeowners
In most cases now, yes. The federal rule that made forgiven mortgage debt tax-free on a primary residence expired on December 31, 2025. Debt forgiven now is generally treated as taxable income unless a separate exception applies, and insolvency is the one that covers most underwater sellers. This page explains how that works so you can bring the right questions to a CPA.
From 2007 through 2025, a rule called the qualified principal residence indebtedness exclusion let homeowners leave forgiven mortgage debt off their federal return — up to $750,000, or $375,000 if married filing separately — when the debt was tied to a main home. Congress renewed it repeatedly. The last renewal ran through the end of 2025, and it was not extended again.
So a short sale that closed while the exclusion was in force and one that closes now can produce very different tax outcomes on the same forgiven balance. Most articles about short sale taxes were written while the exclusion still existed, so they describe the old rule.
Congress could restore the exclusion, and has done so retroactively before. Nothing on this page assumes it will.
When a lender agrees to accept less than the full balance and writes off the rest, the amount written off is called cancellation of debt. The lender reports it to you and to the IRS on Form 1099-C, usually in January following the year of the short sale.
A 1099-C is not a bill. It reports an amount that may be income. Whether it becomes taxable income depends on which exceptions you qualify for, and that is claimed on your return with Form 982. Two people with identical 1099-Cs can owe very different amounts.
Fit check
If your total debts exceeded the value of everything you owned immediately before the debt was forgiven, the forgiven amount is excluded up to the amount you were insolvent by.
Debt discharged in a Title 11 bankruptcy case is excluded from income. This is separate from insolvency and has its own filing requirements.
The old exclusion can still apply if the discharge happened before 2026, or under a written arrangement entered into before January 1, 2026, even when closing came later.
Recourse and non-recourse loans are taxed differently. A non-recourse loan generally produces no cancellation of debt income at all, though other tax may apply.
The tax question does not change whether a short sale is the right move, but it changes what the move costs, and that is easier to plan for in advance than to discover in January. Two things are worth doing early.
First, get a rough insolvency picture before you commit to a path. If your debts clearly exceed your assets, the exception may cover most or all of the forgiven amount, and the change may matter less to you than the headline suggests.
Second, keep every document with a date on it — the lender's approval letter especially. Dates decide which rule applies to you.
Bring these before you accept a short sale approval, not after closing.
Generally yes on a federal return, because the principal residence exclusion expired December 31, 2025. The insolvency and bankruptcy exceptions still exist, and many underwater sellers qualify for insolvency. A CPA can tell you which applies to you.
It is the form your lender uses to report forgiven debt to you and the IRS, usually in January after the sale. It is not a bill. Give it to your tax preparer along with your asset and debt figures from the date of closing.
It depends on your paperwork. The older exclusion can still apply to a discharge made under a written arrangement entered into before January 1, 2026. The date on your lender's written approval matters, so keep it and show it to your CPA.
No. The exclusion that expired only ever covered a main home. Forgiven debt on investment property follows different rules, and insolvency and bankruptcy may still apply. This is a question for a CPA who has seen the full picture.
No, they are separate. A deficiency is whether the lender can still pursue you for the shortfall under Colorado law. Tax is what the IRS does with the amount forgiven. A short sale can settle one and not the other, which is why the waiver language in the approval matters.
Not by itself. Forgiven debt can be reported after a foreclosure or a deed in lieu as well. The comparison between those paths involves credit, timing, deficiency exposure and tax together rather than any one of them alone.
We are licensed real estate brokers, not tax professionals. We can explain how a short sale works, negotiate the deficiency waiver language with your lender, and get the house sold. We cannot tell you what you will owe, and anyone in our position who gives you a number is guessing.
If you do not have a CPA, say so and we will give you names of people who have handled these in Colorado. There are also HUD-approved housing counselors in Colorado who provide free guidance.
Call or text and we will walk through where you actually stand before you commit to anything.