Tax Consequences After a Foreclosure, Short Sale, or Deed in Lieu of Foreclosure

If you've lost your home through foreclosure, you might still be on the hook for taxes. Tax liability can happen if the foreclosure sale price is less than the amount you owed on your mortgage. The extra amount you owe is called the "deficiency." If the lender forgives some or all of the deficiency amount, then the IRS or state taxing authority might treat the forgiven debt as income, and you might have to pay taxes on it. The same principles apply with short sales and deeds in lieu of foreclosure. Fortunately, at least through 2025, most people who lose their homes through a foreclosure, short sale, or deed in lieu of foreclosure won't face federal income tax liability.