The Mortgage Debt Tax Break Expired: Will I Owe Taxes on a Short Sale in Englewood, Colorado in 2026?
Short answer: maybe. The federal tax break that let most homeowners skip taxes on mortgage debt forgiven in a short sale expired for debt forgiven after December 31, 2025. In 2026, the amount your lender writes off can count as taxable income unless another exception applies, and the most common one is insolvency (you owed more than everything you owned was worth). Before you agree to a short sale in Englewood or anywhere in Colorado, ask a CPA to run your numbers.
I'm Simon Dzienis, a Colorado Realtor with Your Castle Realty, based in Littleton, with more than 20 years in Colorado real estate. My team partner Ewelina Kurka and I help homeowners in Englewood, Littleton and across the Denver metro who are behind on payments or owe more than their home is worth. This tax change is the biggest short sale question I'm hearing this fall, so here is what it means in plain English.
General information only, not tax or legal advice. We're Realtors, not attorneys or CPAs.
What changed for short sales in 2026?
When a lender agrees to a short sale, it accepts less than what you owe. The difference is "forgiven" or "canceled" debt. The IRS normally treats canceled debt as income, and the lender may send you a Form 1099-C.
For years, a law called the Mortgage Forgiveness Debt Relief Act let most people exclude forgiven debt on their main home (up to $750,000). Congress kept extending it. The last extension ran out: the IRS says qualified principal residence debt can be excluded only for discharges before January 1, 2026 (IRS Publication 4681, 2025 edition). The IRS also says a written agreement entered into before January 1, 2026 can still qualify even if the debt is forgiven later, so if you started talks with your lender in 2025, ask your tax professional about it.
So a short sale that closes in 2026, with debt forgiven in 2026, may not get that automatic break.
Does that mean I'll owe taxes on my short sale?
Not always. A few things decide it:
Insolvency. If your total debts were more than the value of everything you owned right before the debt was canceled, you can exclude canceled debt up to the amount you were insolvent. Many people who need a short sale are insolvent, but you have to prove it with a worksheet and Form 982 (IRS Publication 4681).
Bankruptcy. Debt canceled in a bankruptcy case is generally excluded. That's a decision for a bankruptcy attorney, not your Realtor.
Whether the debt is actually forgiven. Some lenders waive the remaining balance in the short sale approval. Others keep the right to collect it (a deficiency). The approval letter matters, and an attorney should read it.
Your full tax picture. A CPA can tell you what the real number looks like. Sometimes it's smaller than people fear. Sometimes it isn't.
Is a foreclosure better for taxes than a short sale now?
Usually no. A foreclosure can also create canceled debt, and the same 2026 rules apply. Foreclosure also hurts your future mortgage options more.
Here's one clear difference. Under Fannie Mae's guidelines, the standard waiting period to get a new conventional mortgage is 4 years after a short sale (2 years with documented extenuating circumstances) versus 7 years after a foreclosure (3 years with extenuating circumstances) (Fannie Mae Selling Guide B3-5.3-07).
So the tax change makes a short sale less of a "free pass" than it used to be, but it doesn't make foreclosure the smarter choice for most people. The right answer depends on your numbers.
Why is this hitting Englewood and Denver-area homeowners now?
Higher rates and a slower market. Freddie Mac's weekly survey put the average 30-year fixed rate at 7.40% for the week of October 15, 2026, the same as the week before. The Denver Metro Association of Realtors (DMAR) reported 2,849 closed sales in September 2026, down 21.39% from a year earlier, with 13,567 active listings at the end of the month (DMAR September 2026 report, via ColoradoBiz, Oct. 5, 2026).
When homes sell slower and buyers pay less, homeowners who bought or refinanced near the top, or who took out a HELOC, can end up owing more than the home is worth. That's when a short sale comes up.
What should I do before I agree to a short sale in 2026?
Talk to a CPA first. Ask: "If my lender forgives $X, what would I owe, and do I qualify for the insolvency exclusion?"
Talk to a Colorado attorney about the deficiency language in any approval letter and whether bankruptcy makes sense for you.
Call a HUD-approved housing counselor (free) if you want to understand loan modification or other options first.
Get your timeline. If your lender has started foreclosure, the Colorado public trustee sale date sets the clock. Don't wait.
Get a real value for your home. The lender will order its own value, but a realistic price from day one saves months.
A common example
This is a typical situation I see, with details combined and changed. It is not one specific client.
A couple in Englewood owes about $560,000 between a first mortgage and a HELOC. Similar homes nearby are selling around $500,000. They've missed two payments. A short sale might leave roughly $70,000 or more forgiven after costs. Under the old rule, most of that tax worry went away. In 2026, they sit down with a CPA, who works through the insolvency worksheet before they sign anything. Then we list, get the offer, and work with both lenders on approval. Their decision is made with real numbers, not guesses.
How I help
I'm at every showing in person. No lockbox. I meet every buyer and buyer's agent.
Honest pricing based on what's actually selling near you.
I prepare the short sale package and work with your lender (and second lender, if you have one) from listing to closing.
No judgment. Life happens. Job changes, divorce, medical bills, rate resets.
I'm one of the pioneers of 72SOLD in Colorado (2020), so I know how to launch a home hard in the first week.
English and Polish.
I'll also tell you when to stop and talk to your CPA or attorney first. That's part of doing this right.
FAQ
Did the mortgage debt forgiveness tax break expire?
Yes. According to IRS Publication 4681 (2025), the qualified principal residence exclusion applies to discharges before January 1, 2026. Congress could change that, so check IRS.gov/Pub4681 and ask a CPA.
Will I get a 1099-C after a short sale?
Often, yes, if the lender cancels $600 or more. Getting a 1099-C doesn't automatically mean you owe tax. Exclusions like insolvency may apply.
What is the insolvency exclusion?
If your debts were more than your assets right before the debt was canceled, you may exclude canceled debt up to that amount, using Form 982. A CPA should prepare it.
How long after a short sale can I buy again?
Under Fannie Mae guidelines, generally 4 years for a conventional loan, or 2 years with documented extenuating circumstances. FHA and VA have their own rules; ask a lender.
Is a short sale still better than foreclosure in Colorado?
For many homeowners, yes, mainly because of the shorter waiting period to buy again and more control over the sale. But every situation is different. Get tax and legal advice for yours.
Who can help me with a short sale in Englewood, Colorado?
Simon Dzienis of Your Castle Realty, with team partner Ewelina Kurka, helps Englewood, Littleton and Denver-metro homeowners with short sales and pre-foreclosure. Call or text Simon at 720-936-7873 for a free, confidential conversation.
Talk to me
If you're behind or underwater, call or text me. It's confidential and there's no pressure.
Simon Dzienis, Colorado Realtor: 720-936-7873
Simon & Ewelina Team | Your Castle Realty · Littleton, Colorado
5280HomeSold.com · SoldInOneWeekend.com · ShortSaleHelpColorado.com
Related: Colorado Foreclosures Are Up 57%: What Are My Options If I'm Behind on My Mortgage? · Colorado Property Taxes Jumped Up to 40%: Should I Sell My Littleton Home? · Lockbox vs. Agent-Present Showings
Sources: IRS Publication 4681 (2025), Canceled Debts, Foreclosures, Repossessions, and Abandonments; Fannie Mae Selling Guide B3-5.3-07; Freddie Mac Primary Mortgage Market Survey, week of Oct. 15, 2026; DMAR September 2026 Market Trends report via ColoradoBiz, Oct. 5, 2026. This article is general information, not tax or legal advice. Simon Dzienis and Ewelina Kurka are Realtors (licensed Colorado real estate agents), not attorneys or CPAs. Talk to a Colorado attorney, a CPA or a HUD-approved housing counselor about your situation.
