Foreclosures and Repossessions: Canceled Debt and Property Loss (2025 IRS Guide)

This guide covers “Foreclosures and Repossessions” within canceled debt and property loss. 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 4681 (2025), Canceled Debts, Foreclosures, Repossessions, and Abandonments, 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.

Foreclosures and Repossessions

If you don’t 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 from which you may realize gain or loss. This is true even if you voluntarily return the property to the lender. If the outstanding loan balance was more than the FMV of the property and the lender cancels all or part of the remaining loan balance, you may also realize ordinary income from the cancellation of debt. You must report this income on your return unless certain exceptions or exclusions apply. See chapter 1 for more details.

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. The gain is the difference between the amount realized and your adjusted basis in the transferred property (amount realized minus adjusted basis). The loss is the difference between your adjusted basis in the transferred property and the amount realized (adjusted basis minus amount realized). For more information on figuring gain or loss from the sale of property, see Gain or Loss From Sales and Exchanges in Pub. 544.

.You can use Table 1-1 to figure your ordinary income from the cancellation of debt and your gain or loss from a foreclosure or repossession..

Amount realized and ordinary income on a recourse debt.

If you are personally liable for the debt, the amount realized on the foreclosure or repossession includes the smaller of:

1. The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or

2. The FMV of the transferred property.

The amount realized also includes any proceeds you received from the foreclosure sale. If the FMV of the transferred property is less than the total outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, the difference is ordinary income from the cancellation of debt. You must report this income on your return unless certain exceptions or exclusions apply. See chapter 1 for more details.

Example 1.

In 2024, you paid $200,000 for a home. You made a $15,000 down payment and borrowed the remaining $185,000 from a bank. You are personally liable for the mortgage loan and the house secures the loan. In 2025, the bank foreclosed on the mortgage because you stopped making payments. When the bank foreclosed the mortgage, 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 that was deducted. At the time of the foreclosure, the bank forgave $2,000 of the $10,000 debt in excess of the FMV ($180,000 minus $170,000). You remained personally liable for the $8,000 balance.

In this case, you have ordinary income from the cancellation of debt in the amount of $2,000. The $2,000 income from the cancellation of debt is figured by subtracting the $170,000 FMV of the house from the $172,000 difference between the total outstanding debt immediately before the transfer of property and the amount for which you remain personally liable immediately after the transfer ($180,000 minus $8,000). You are able to exclude the $2,000 of canceled debt from income under the qualified principal residence indebtedness rules, discussed earlier.

You must also determine the gain or loss from the foreclosure. In this case, the amount realized is $170,000. This is the smaller of:

1. $172,000 (the $180,000 of outstanding debt immediately before the transfer minus $8,000 for which you remain personally liable immediately after the transfer), or

2. $170,000 (the FMV of the house).

You figure the gain or loss on the foreclosure by comparing the $170,000 amount realized with the $175,000 adjusted basis. You have a $5,000 nondeductible loss.

Example 2.

You bought a new car for $15,000. You made a $2,000 down payment and borrowed the remaining $13,000 from the dealer’s credit company. You are personally liable for the loan (recourse debt) and the car is pledged as security for the loan. On August 3, 2025, 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 it was repossessed was $9,000. On November 16, 2025, the credit company forgave the remaining $1,000 balance on the loan due to insufficient assets.

In this case, the amount you realize is $9,000. This is the smaller of:

1. $9,000 (the $10,000 outstanding debt immediately before the repossession minus the $1,000 for which you remain personally liable immediately after the repossession), or

2. $9,000 (the FMV of the car).

You figure the gain or loss on the repossession by comparing the $9,000 amount realized with the $15,000 adjusted basis. You have a $6,000 nondeductible loss. After the cancellation of the remaining balance on the loan in November, you also have ordinary income from cancellation of debt in the amount of $1,000 (the remaining balance on the $10,000 loan after the $9,000 amount satisfied by the FMV of the repossessed car). You must report the $1,000 on the return unless one of the exceptions or exclusions described in chapter 1 applies.

Table 1-1. Worksheet for Foreclosures and Repossessions

Amount realized on a nonrecourse debt.

If you aren’t personally liable for repaying the debt secured by the transferred property, the amount you realize includes the full amount of the outstanding debt immediately before the transfer. This is true even if the FMV of the property is less than the outstanding debt immediately before the transfer.

Example 1.

You paid $200,000 for a home. You made a $15,000 down payment and borrowed the remaining $185,000 from a bank. You aren’t personally liable for the loan, but the loan was secured by a mortgage on the house.

The bank foreclosed on the mortgage because you stopped making payments. When the bank foreclosed on the mortgage, 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 that was deducted.

The amount you realized on the foreclosure is $180,000, the outstanding debt immediately before the foreclosure. You figure the gain or loss by comparing the $180,000 amount realized with the $175,000 adjusted basis. You have a $5,000 realized gain. See Pub. 523, to figure and report any taxable amount.

Example 2.

You bought a new car for $15,000. You made a $2,000 down payment and borrowed the remaining $13,000 from the dealer’s credit company. You aren’t personally liable for the loan (nonrecourse), but pledged the new car as security for the loan.

On August 3, 2025, 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 it was repossessed was $9,000.

The amount you realized on the repossession is $10,000. That is the outstanding amount of debt immediately before the repossession, even though the FMV of the car is less than $10,000. You figure the gain or loss on the repossession by comparing the $10,000 amount realized with the $15,000 adjusted basis. You have a $5,000 nondeductible loss.

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, Acquisition or Abandonment of Secured Property, showing 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 can include the information about the foreclosure or repossession on that form instead of on Form 1099-A. 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, credit union, federal government agency, or other applicable entity, as discussed earlier in chapter 1. 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 4681 (2025), Canceled Debts, Foreclosures, Repossessions, and Abandonments: 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.