The Mortgage Forgiveness Debt Relief Act exclusion lets you leave forgiven debt on your main home out of income only if it was discharged before January 1, 2026, or under a written arrangement made before that date, according to the IRS as of September 2026. For a short sale closing later, the forgiven balance is generally taxable unless another exclusion applies, most often insolvency claimed on Form 982. Utah starts from federal adjusted gross income and taxes it at a flat 4.45% for 2026.
At a glance
| Principal residence exclusion | Debt discharged before January 1, 2026, or under a written arrangement made before then (26 U.S.C. 108; IRS Topic 431, updated September 2026) |
|---|---|
| Exclusion limit | $750,000 ($375,000 married filing separately) |
| Insolvency exclusion | Up to the amount you were insolvent; claimed on Form 982 |
| Utah income tax rate | 4.45% flat for 2026 (Utah Code 59-10-104) |
What is the Mortgage Forgiveness Debt Relief Act?
When a lender forgives part of what you owe, the IRS generally treats the forgiven amount as income. The Mortgage Forgiveness Debt Relief Act of 2007 created an exception for debt on your main home. The IRS describes the original law as covering debt forgiven in 2007 through 2017, with a limit of $2 million ($1 million if married filing separately).
Congress extended the exclusion several times, last changing its end date in December 2020 (Pub. L. 116-260). The current text of the tax code, 26 U.S.C. 108(a)(1)(E), covers qualified principal residence indebtedness discharged before January 1, 2026, or under an arrangement entered into and evidenced in writing before that date, with a limit of $750,000 ($375,000 if married filing separately). The July 2025 tax law (Pub. L. 119-21) did not change that date.
Is there still mortgage debt forgiveness relief in 2026?
Not under this exclusion, as of the IRS guidance this page relies on. IRS Publication 4681 for 2025 returns says the debt cannot be excluded for discharges completed or agreements entered into after December 31, 2025, and IRS Topic 431, updated September 24, 2026, still lists the exclusion only for debt discharged before January 1, 2026. A bill in Congress would make the exclusion permanent, but its status could not be confirmed. Ask a CPA whether Congress has changed the rule before you file.
What counts as qualified principal residence debt?
It is a mortgage taken out to buy, build or substantially improve your main home and secured by that home. A home equity line used for a car, tuition or credit cards does not qualify, even when it is secured by the house.
What does a 1099-C mean after a short sale?
A short sale has two tax pieces: the sale of the home, and the debt the lender forgives. A Form 1099-C means the lender reported a canceled debt to the IRS. The IRS says you must report canceled debt as income even if no 1099-C arrives, unless an exception or exclusion applies, and you must report the correct amount even if the form is wrong. If it is wrong, contact the lender to correct it.
When the 1099-C arrives
Canceled debt is reported for the year it was canceled. A short sale that closes in 2026 belongs on the 2026 return, filed in 2027.
Recourse and nonrecourse debt
IRS Publication 4681 explains the split for foreclosures. With recourse debt, forgiven debt above the home's fair market value can be ordinary income. With nonrecourse debt, there is no cancellation-of-debt income, and the whole debt is treated as the amount realized on the sale, which can produce a gain or loss instead. Utah law lets a lender pursue a deficiency within set deadlines, but whether your loan is recourse for federal tax purposes depends on the loan and is a question for a CPA.
How the insolvency exclusion and Form 982 work
The insolvency exclusion in 26 U.S.C. 108(a)(1)(B) has no 2025 end date, so it still applies to short sales in 2026. You are insolvent to the extent your total liabilities were more than the fair market value of all your assets immediately before the debt was canceled, and you can exclude canceled debt only up to that amount.
How to claim it
Attach Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, to your federal return. Part II of the form reduces certain tax attributes by the amount excluded, which can affect future returns. A seller whose home is worth less than the loan starts with that gap on the liability side, so it is worth listing every asset and every debt as of the day before closing. Publication 4681 explains how the IRS measures insolvency.
Example: how forgiven debt is figured on a Herriman short sale
Example only, an illustration and not a tax result. A Herriman home sells for the city's typical value of $601,499 (Zillow's typical home value, August 2026). The loan payoff is $640,000, and commission and closing costs paid from the sale come to $42,000.
| Line | Amount |
|---|---|
| Loan payoff | $640,000 |
| Sale price | $601,499 |
| Less selling costs (illustration) | $42,000 |
| Paid to the lender | $559,499 |
| Debt forgiven | $80,501 |
Because the sale closes after 2025 with no written arrangement made before January 1, 2026, the principal residence exclusion would not apply under current IRS guidance. If the seller's liabilities were $40,000 more than the value of their assets just before the sale, up to $40,000 could be excluded as insolvency on Form 982, leaving $40,501 in income. Utah's 4.45% rate on that amount would be about $1,802 before any other adjustments; if none of it were excluded, about $3,582.
The gap between payoff and value in this example is the same negative equity described on selling a home with an underwater mortgage.
How Utah taxes forgiven mortgage debt
Utah's income tax starts from federal adjusted gross income (Utah Code 59-10-103), and the 2026 rate is a flat 4.45% of state taxable income (Utah Code 59-10-104, effective January 1, 2026). So forgiven debt that is excluded federally generally stays out of Utah's starting figure, and debt that is taxable federally is generally taxable in Utah too. No Utah-specific rule for canceled mortgage debt was found, so treat this as Utah generally following the federal figure.
Utah deficiency deadlines and taxes
Tax and deficiency are separate questions. Under Utah Code 78B-2-313, a lender's suit for the shortfall after a short sale of a single-family home is barred unless filed within three months after the release or reconveyance is recorded, unless there was fraud or you signed an agreement to pay part of the deficiency. After a trustee sale, Utah Code 57-1-32 gives the lender three months and caps any judgment using the home's fair market value. A balance you agree to keep paying is not forgiven, and a forgiven balance is what the 1099-C reports. How lenders decide to accept less is on how a short sale works and why lenders agree.
Tax questions to settle before a short sale closes
Read the approval letter for whether the deficiency is waived, and ask any second lender whether it is forgiving its balance or only releasing its lien. Both answers change what appears on a 1099-C. Selling for less than you owe also has credit effects, set out on how a short sale affects your credit, and the choice between a short sale and other ways to sell is on selling a Herriman home that is worth less than the loan.
This page explains the rules, not your tax result. Talk to a CPA or enrolled tax professional before you accept a short sale approval, and again when the 1099-C arrives, to check the amount, the insolvency calculation on Form 982, and whether Congress has changed the principal residence exclusion for 2026.
Frequently asked questions
Is there still tax forgiveness available for mortgage debt in 2026?
The principal residence exclusion created by the Mortgage Forgiveness Debt Relief Act covers debt discharged before January 1, 2026, or under a written arrangement made before then, according to IRS guidance updated September 2026. The insolvency exclusion still applies in 2026. A bill to restore the home exclusion was pending, so ask a CPA whether Congress has changed it.
Is a forgiven loan counted as income?
Generally yes. IRS Topic 431 says canceled debt is taxable and reported for the year it was canceled, unless an exception or exclusion applies, such as insolvency or, for debt discharged before January 1, 2026, the principal residence exclusion. Nonrecourse debt is treated differently: it counts toward the sale amount rather than as canceled-debt income.
How much tax do you pay on forgiven mortgage debt?
Taxable forgiven debt is added to your income and taxed at your ordinary federal rate. In Utah, the state tax starts from federal adjusted gross income, and the 2026 rate is a flat 4.45%. On $80,000 of fully taxable forgiven debt, Utah's share would be about $3,560 before other adjustments. A CPA can figure the federal amount.
What if I did not get a 1099-C after my short sale?
You still have to report canceled debt as income unless an exclusion applies, the IRS says. A missing form does not mean the debt was not forgiven. Ask the lender whether it issued one and for what amount, and keep the approval letter and closing statement showing what was paid and what was forgiven.
What if the amount on my 1099-C is wrong?
Contact the lender and ask it to correct the form. The IRS says you must report the correct amount of canceled debt regardless of what the 1099-C shows, so keep the documents that support your figure, such as the payoff statement, the short sale approval letter and the final closing statement.
Does a home equity line forgiven in a short sale qualify for the exclusion?
Only the part used to buy, build or substantially improve your main home counts as qualified principal residence debt, and only for debt discharged before January 1, 2026, or under a written arrangement made before then. A line used for other spending does not qualify, though the insolvency exclusion on Form 982 may still apply.
Sources
- IRS: Home Foreclosure and Debt Cancellation (updated Sept. 5, 2019; reviewed July 20, 2026)
- IRS: Topic no. 431, Canceled debt - Is it taxable or not? (updated September 24, 2026)
- IRS: Publication 4681 (2025), Canceled Debts, Foreclosures, Repossessions, and Abandonments
- Cornell LII: 26 U.S. Code 108, Income from discharge of indebtedness
- Utah Legislature: Utah Code 59-10-104 (effective January 1, 2026)
- Utah Legislature: Utah Code 59-10-103
- Utah Legislature: Utah Code 78B-2-313
- Utah Legislature: Utah Code 57-1-32
- Zillow Research: Home Value Index, Herriman city (August 2026)