You Decide Realty · Short Sale & Foreclosure Help Center
For most of the last two decades, forgiven mortgage debt on a primary residence was excluded from your taxable income. That rule — the qualified principal residence indebtedness exclusion — is why “short sales are tax-free” became conventional wisdom.
It expired for discharges completed after December 31, 2025. The IRS says so in plain language. The bill to renew it is still sitting in a House committee. And a great many real estate websites in this valley still tell homeowners the old rule.
This is not a reason to panic, and it is not a reason to avoid a short sale. It is a reason to bring a CPA into the conversation before you sign an approval letter, because there are other exclusions and one of them probably applies to you.
Canceled debt is generally taxable income. The qualified principal residence indebtedness (QPRI) exclusion no longer applies to discharges completed — or written discharge agreements entered into — after December 31, 2025. Two other protections remain and are now the main event: the insolvency exclusion, which covers you to the extent your liabilities exceeded the fair market value of your assets immediately before the cancellation, and nonrecourse treatment, which can eliminate cancellation-of-debt income entirely and is unusually relevant in Nevada because of our anti-deficiency statutes. Nevada has no state income tax, so this is a federal question only.
IRS Publication 4681: “Qualified principal residence indebtedness cannot be excluded from income for discharges completed or discharge agreements entered into after December 31, 2025.”
The statute itself, 26 U.S.C. § 108(a)(1)(E), still carries the sunset. The One Big Beautiful Bill Act of July 2025 amended a different subsection of § 108 and did not touch it. H.R. 917, the Mortgage Debt Tax Forgiveness Act of 2025, would make the exclusion permanent — it was referred to the House Ways and Means Committee in February 2025 and has not been enacted. Verify the current status with your CPA before you act; Congress has revived this exclusion retroactively before.
When a lender forgives $600 or more, it files a Form 1099-C, Cancellation of Debt, with the IRS and sends you a copy. A short sale typically produces a 1099-C with Box 6 code F — discharge under a creditor-debtor agreement. A foreclosure often produces a Form 1099-A instead, or both.
That amount lands on your return as ordinary income unless an exclusion applies. Layered on top of wages, a large forgiven balance can push a household into a materially higher bracket. This is the part homeowners do not see coming, because it arrives in January of the following year, long after the moving truck.
The statute excluded debt discharged before January 1, 2026 or discharged subject to an arrangement entered into and evidenced in writing before January 1, 2026. If your short sale was papered in 2025 and closed in 2026, there may be an argument. It is fact-specific and it is not a real estate licensee’s call — but it is worth raising.
Under 26 U.S.C. § 108(a)(1)(B), canceled debt is excluded to the extent you were insolvent immediately before the cancellation. Many genuinely underwater homeowners qualify — and a lot of them never claim it because nobody told them.
The IRS definition: “You were insolvent immediately before the cancellation to the extent that the total of all of your liabilities was more than the FMV of all of your assets immediately before the cancellation.”
You exclude the smaller of the amount of debt canceled or the amount by which you were insolvent. So if $50,000 is forgiven and you were insolvent by $80,000, the entire $50,000 is excluded. If you were insolvent by only $30,000, you exclude $30,000 and report $20,000.
IRS Publication 4681 contains an Insolvency Worksheet. Fill it out as of the discharge date and keep the supporting documentation. Your CPA will thank you and it may be worth tens of thousands of dollars.
Here is where Nevada’s anti-deficiency statutes reach into federal tax law.
IRS Publication 4681 on nonrecourse debt in a foreclosure or abandonment: “you won’t have cancellation of indebtedness income… The entire amount of the nonrecourse debt is treated as an amount realized on the disposition of the property.”
With nonrecourse debt there is no cancellation-of-debt income at all — the whole thing folds into the amount realized and the transaction is tested as a sale for gain or loss.
Why that matters here: where NRS 40.455(3) or NRS 40.458 bars a deficiency, the lender has no personal recourse against you. There is Tax Court authority applying exactly that logic under an analogous state anti-deficiency statute — Simonsen v. Commissioner (2018) treated a California short sale as a single transaction, folded the discharged balance into the amount realized because the debt was nonrecourse, and found no COD income.
This is a legitimate and potentially decisive argument for a Nevada homeowner whose loan is protected by our anti-deficiency statutes. It is also fact-specific, it depends on your particular loan, and the lender may issue a 1099-C anyway.
So the right move is a question, not a conclusion: “Is my loan nonrecourse for federal tax purposes under Nevada’s anti-deficiency statutes?” Ask your CPA that, in those words. We are a brokerage and we will not tell you the answer.
The flip side: if there is no COD income because it is treated as a sale, there can still be gain if the debt exceeds your adjusted basis. For a principal residence, IRC § 121 may exclude up to $250,000 (or $500,000 for a married couple filing jointly) of that gain. And a loss on a personal residence is not deductible.
You claim any § 108 exclusion on Form 982, attached to the return for the year of discharge.
| Exclusion | Authority | Box | Status for 2026 |
|---|---|---|---|
| Title 11 bankruptcy | § 108(a)(1)(A) | Line 1a | Available |
| Insolvency | § 108(a)(1)(B) | Line 1b | Available |
| Qualified principal residence indebtedness | § 108(a)(1)(E) | Line 1e | Expired for post-2025 discharges |
Claiming an exclusion generally requires you to reduce your tax attributes in Part II of Form 982 — net operating losses, capital losses, credits, and basis in property you still own. Reducing basis can increase taxable gain on a future sale. It is frequently still the right move by a wide margin. Just know what you are signing.
Nevada has no state income tax. Whatever happens here is a federal question only. A homeowner in California or New York facing the same forgiven balance has a second bill coming. You do not.
Questions we get every week
By default, yes — forgiven mortgage debt is generally taxable income. The qualified principal residence indebtedness exclusion, which made forgiven mortgage debt on a primary home tax-free, does not apply to discharges completed or discharge agreements entered into after December 31, 2025, per IRS Publication 4681. Two other protections remain: the insolvency exclusion under IRC § 108(a)(1)(B), which many underwater homeowners qualify for, and nonrecourse treatment, which can eliminate cancellation-of-debt income entirely. Talk to a CPA before you sign a short sale approval, not after closing.
It excludes canceled debt to the extent your total liabilities exceeded the fair market value of all your assets immediately before the cancellation. You exclude the smaller of the amount canceled or the amount by which you were insolvent. It is a balance-sheet test, not a cash-flow test, and all assets count at fair market value — including retirement accounts and assets otherwise exempt from creditors, which surprises people. IRS Publication 4681 contains an Insolvency Worksheet; fill it out as of the discharge date and keep the supporting documents.
No. Nevada has no state income tax, so cancellation-of-debt income from a short sale or foreclosure is a federal issue only for Nevada residents. A homeowner in a state with an income tax facing the same forgiven balance may have a second bill; you do not.
Form 1099-C, Cancellation of Debt, is filed by a lender when it forgives $600 or more, with a copy to you. A short sale typically produces one with Box 6 code F — discharge under a creditor-debtor agreement. Do not ignore it: the IRS received the same copy. Give it to your CPA, compare the forgiven amount against your lender's approval letter, and if it is wrong, address it while it is fresh. Any exclusion you claim is reported on Form 982 with your return for the year of the discharge.
It could — H.R. 917, the Mortgage Debt Tax Forgiveness Act of 2025, would make the exclusion permanent for discharges after December 31, 2025, and Congress has revived this exclusion retroactively in the past. As of this page's verification date it remained in the House Ways and Means Committee and had not been enacted. Plan for the law as it currently stands, and have your CPA check the status before you file.
Once a Nevada trustee’s sale is held, title vests in the purchaser with no right of redemption — there is no undo. But until then, an owner-occupant’s right to reinstate generally runs to five days before the sale, and a pending offer is a reason to ask for a postponement.
702-843-0044Ken Calder · Nevada Broker B.1001776 · Speak to a licensed broker, not a call center.
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