Foreclosures and Repossessions: Business Property Sales (2025 IRS Guide)
This guide covers “Foreclosures and Repossessions” within business property sales. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.
Adapted from Publication 544 (2025), Sales and Other Dispositions of Assets, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.
Context for these rules
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Sales and exchanges,
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Abandonments,
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Foreclosures and repossessions,
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Involuntary conversions,
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Nontaxable exchanges,
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Transfers to spouse, and
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Rollovers, exclusions, and deferrals of certain capital gains.
Publication
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523 Selling Your Home
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537 Installment Sales
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547 Casualties, Disasters, and Thefts
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550 Investment Income and Expenses
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551 Basis of Assets
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908 Bankruptcy Tax Guide
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4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals)
Form (and Instructions)
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Schedule D (Form 1040) Capital Gains and Losses
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1040 U.S. Individual Income Tax Return
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1040-X Amended U.S. Individual Income Tax Return
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1099-A Acquisition or Abandonment of Secured Property
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1099-C Cancellation of Debt
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4797 Sales of Business Property
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8824 Like-Kind Exchanges
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8949 Sales and Other Dispositions of Capital Assets
See How To Get Tax Help at the end of this publication for information about getting publications and forms.
Foreclosures and Repossessions
If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. The foreclosure or repossession is treated as a sale or exchange from which you may realize a gain or loss. This is true even if you voluntarily return the property to the lender. You may realize ordinary income from the cancellation of debt if the loan balance is more than the FMV of the property.
Buyer’s (borrower’s) gain or loss.
You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. See Gain or Loss From Sales and Exchanges, earlier.
Tip:
You can use Table 1-2 to figure your gain or loss from a foreclosure or repossession.
Amount realized on a nonrecourse debt.
If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full debt canceled by the transfer. The full canceled debt is included even if the FMV of the property is less than the canceled debt.
Example 1.
You bought a new car for $15,000. You paid $2,000 down and borrowed the remaining $13,000 from the dealer’s credit company. You are not personally liable for the loan (nonrecourse debt) and pledge the new car as security. The credit company repossessed the car because you stopped making loan payments. The balance due after taking into account the payments you made was $10,000. The FMV of the car when repossessed was $9,000. The amount you realized on the repossession is $10,000. That is the outstanding amount of the debt canceled by the repossession, even though the car’s FMV is less than $10,000. You figure your gain or loss on the repossession by comparing the amount realized ($10,000) with your adjusted basis ($15,000). You have a $5,000 nondeductible loss.
Example 2.
You paid $200,000 for your home. You paid $15,000 down and borrowed the remaining $185,000 from a bank. You are not personally liable for the loan (nonrecourse debt) and pledge the house as security. The bank foreclosed on the loan because you stopped making payments. When the bank foreclosed on the loan, the balance due was $180,000, the FMV of the house was $170,000, and your adjusted basis was $175,000 due to a casualty loss you had deducted. The amount you realized on the foreclosure is $180,000, the balance due and debt canceled by the foreclosure. You figure your gain or loss by comparing the amount realized ($180,000) with your adjusted basis ($175,000). You have a $5,000 realized gain.
Amount realized on a recourse debt.
If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of:
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The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or
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The FMV of the transferred property.
Seller’s (lender’s) gain or loss on repossession.
If you finance a buyer’s purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. For more information, see Repossession in Pub. 537.
Table 1-2. Worksheet for Foreclosures and Repossessions
Keep for Your Records
| Part 1. Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Complete this part only if you were personally liable for the debt. Otherwise, go to Part 2. | |
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| 1. Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable after the transfer of property | _____ |
| 2. Enter the FMV of the transferred property | _____ |
| 3. Ordinary income from cancellation of debt upon foreclosure or repossession.* Subtract line 2 from line 1. If less than zero, enter -0- | |
| Part 2. Figure your gain or loss from foreclosure or repossession. | |
| 4. If you completed Part 1 enter the smaller of line 1 or line 2. If you did not complete Part 1 enter the outstanding debt immediately before the transfer of property | _____ |
| 5. Enter any proceeds you received from the foreclosure sale | _____ |
| 6. Add lines 4 and 5 | _____ |
| 7. Enter the adjusted basis of the transferred property | _____ |
| 8. Gain or loss from foreclosure or repossession. Subtract line 7 from line 6 | |
- * The income may not be taxable. See Cancellation of debt.
Cancellation of debt.
If property that is repossessed or foreclosed on secures a debt for which you are personally liable (recourse debt), you must generally report as ordinary income the amount by which the canceled debt is more than the FMV of the property. This income is separate from any gain or loss realized from the foreclosure or repossession. Report the income from cancellation of a debt related to a business or rental activity as business or rental income.
Tip:
You can use Table 1-2 to figure your income from cancellation of debt.
You must report this income on your tax return unless one of the following applies.
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The cancellation is intended as a gift.
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The debt is qualified farm debt.
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The debt is qualified real property business debt.
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You are insolvent or bankrupt.
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The debt is qualified principal residence indebtedness.
Example 1.
Assume the same facts as in Example 1 under Amount realized on a nonrecourse debt, earlier, except you are personally liable for the car loan (recourse debt). In this case, the amount you realize is $9,000. This is the lesser of the canceled debt ($10,000) or the car’s FMV ($9,000). You figure your gain or loss on the repossession by comparing the amount realized ($9,000) with your adjusted basis ($15,000). You have a $6,000 nondeductible loss. You are also treated as receiving ordinary income from cancellation of debt. That income is $1,000 ($10,000 − $9,000). This is the part of the canceled debt not included in the amount realized.
Example 2.
Assume the same facts as in Example 2 under Amount realized on a nonrecourse debt, earlier, except you are personally liable for the loan (recourse debt). In this case, the amount you realize is $170,000. This is the lesser of the canceled debt ($180,000) or the FMV of the house ($170,000). You figure your gain or loss on the foreclosure by comparing the amount realized ($170,000) with your adjusted basis ($175,000). You have a $5,000 nondeductible loss. You are also treated as receiving ordinary income from cancellation of debt. (The debt is not exempt from tax as discussed under Cancellation of debt, earlier.) That income is $10,000 ($180,000 − $170,000). This is the part of the canceled debt not included in the amount realized.
Forms 1099-A and 1099-C.
A lender who acquires an interest in your property in a foreclosure or repossession should send you Form 1099-A showing the information you need to figure your gain or loss. However, if the lender also cancels part of your debt and must file Form 1099-C, the lender may include the information about the foreclosure or repossession on that form instead of on Form 1099-A and send you Form 1099-C only. The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, a credit union, a federal government agency, or any organization that has a significant trade or business of lending money. For foreclosures or repossessions occurring in 2025, these forms should be sent to you by February 2, 2026.
Using the guidance
Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.
Sources and further reading
- Publication 544 (2025), Sales and Other Dispositions of Assets: Gain or Loss — Foreclosures and Repossessions — Internal Revenue Service; 2025 edition.
The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.