If you are upside down on your Southern Utah home and weighing a short sale, one thing changed this year that most local pages have not caught up to. The federal exclusion that let homeowners keep forgiven mortgage debt out of taxable income expired for discharges after December 31, 2025. Congress has not renewed it. So the balance your lender writes off in a 2026 short sale is generally taxable income now, federally and in Utah, unless your discharge falls under an arrangement entered into and evidenced in writing before January 1, 2026, or another exclusion applies to you.
The short version
What this article is: a plain reading of what the IRS and the Utah Code currently say, with the sources linked so you can check them. What it is not: advice about your situation. Nobody can tell you what you owe or what you should sign without seeing your numbers and your paperwork.
The qualified principal residence indebtedness exclusion under Internal Revenue Code section 108(a)(1)(E) covers debt discharged before January 1, 2026, or discharged under an arrangement entered into and evidenced in writing before that date. Congress did not extend it, so a 2026 discharge is generally taxable unless an exception or exclusion applies.
Utah has no separate mortgage-debt exclusion. State taxable income is built from federal adjusted gross income, so whatever is taxable federally flows onto your Utah return as well.
Two exclusions did not expire and can still apply: insolvency under section 108(a)(1)(B), and a qualifying bankruptcy discharge under section 108(a)(1)(A). Both have real conditions and both can reduce tax attributes later. Which one fits, if any, is a question for a CPA.
Separately, Utah Code 78B-2-313 gives a lender only three months after the release or reconveyance is recorded to sue for a deficiency on a qualifying short sale, with exceptions covered below.
Start with your net, not your home's value
In my experience most people who call me convinced they are underwater turn out not to be, and that is worth checking before anything else. But the test is not the home's value against your loan balance. It is your expected proceeds after selling costs against every payoff on the property, including a second mortgage, a HELOC, liens and past-due amounts. A home worth more than the first mortgage can still come up short once those are added.
Some context on how common this is here. ATTOM reported 2.6 percent of mortgaged residential properties in Utah as seriously underwater in the first quarter of 2026, meaning the combined loan balance was at least 125 percent of estimated value, and 47.0 percent of Utah mortgaged properties as equity rich in the second quarter. Those measure the extremes. Neither one captures an owner at 105 percent, or an owner with equity on paper who is short after commissions and payoffs, which is the situation I actually see.
ATTOM's first quarter ranking lists Washington County first among the four Utah counties it names for seriously underwater share, though that article does not publish a percentage for the county. So it happens here.
Running your real net costs nothing and takes about ten minutes. Call or text me at 435-200-5508 and I will pull the comparable sales and net it out against your payoffs. If it comes back positive you have a normal sale and most of this article stops applying to you.
What changed on January 1, 2026
From 2007 through 2025, a homeowner whose qualifying mortgage debt on a principal residence was forgiven could exclude that amount from taxable income. That is the provision people mean when they call a short sale tax-free. It was extended repeatedly, most recently through the end of 2025.
It has now lapsed, with one carve-out that matters. The exclusion still covers debt discharged before January 1, 2026, and debt discharged under an arrangement that was entered into and evidenced in writing before that date. Your original mortgage is not that arrangement; this means a short sale or workout agreement already documented with your lender before the cutoff. The IRS reviewed its canceled-debt guidance on May 14, 2026 and the January 1, 2026 cutoff still stands.
Note also that the historical relief only ever covered qualifying acquisition-type debt on a main home, not every cash-out balance secured by it.
A bill to make the exclusion permanent, the Mortgage Debt Tax Forgiveness Act of 2025, was introduced on February 4, 2025 and referred to the Ways and Means Committee, with no cosponsors and no action since. Congress has restored expired tax provisions retroactively before, so this could change. The bill's status page is here. Primary sources: IRS Publication 4681, IRS Topic 431, and the text of section 108. Verified September 5, 2026.
Utah has no separate mortgage-debt exclusion
Some states decouple from the federal treatment and write their own relief. Utah does not. Utah defines adjusted gross income by reference to the Internal Revenue Code and builds state taxable income from federal adjusted gross income after the specific additions and subtractions in Utah Code 59-10-114. That list has no subtraction for forgiven mortgage debt.
The effect is automatic in both directions. While the federal exclusion applied, the forgiven amount never entered federal adjusted gross income and never reached your Utah return. If an exclusion still applies to you, insolvency or bankruptcy, Utah follows that too and you do not fight a separate state battle. If none applies, the amount lands in Utah taxable income.
To size it: $60,000 of forgiven debt with no exclusion available computes to about $2,670 at Utah's 4.45 percent rate for 2026. Treat that as the raw calculation before credits and their phaseouts rather than your actual added liability, since Utah's taxpayer credit phases out as income rises and a large one-time addition to income can move it. Your federal tax on the same $60,000 is separate and depends on your bracket.
What can still shelter the tax
Two exclusions in the same section of the tax code have no expiration date. Both are described in IRS Publication 4681, which is also where the worksheets live.
Insolvency, section 108(a)(1)(B), excludes canceled debt to the extent your total liabilities exceeded the fair market value of your total assets immediately before the discharge. As an illustration of the mechanic only: insolvent by $40,000 with $60,000 forgiven would leave roughly $40,000 excludable and $20,000 taxable. Your own figures decide the result, and the worksheet is not as simple as that sentence. It is claimed on IRS Form 982, the calculation counts everything you own including retirement accounts and vehicles, and being underwater on one house does not by itself make a household insolvent. Using it can also require reducing tax attributes or the basis in your other property, which can raise tax later.
A qualifying bankruptcy discharge under section 108(a)(1)(A) is a separate exclusion and takes precedence over insolvency where it applies. That is not a suggestion to file bankruptcy; it is a reason to have the conversation with a professional before you sign anything.
One structural point your CPA will raise: whether the debt is recourse or nonrecourse changes the arithmetic. A disposition involving nonrecourse debt generally does not produce ordinary cancellation of debt income at all; the debt goes into the sale proceeds calculation instead, and a separate gain can arise. Foreclosure math does not transfer mechanically to a voluntary sale.
Utah's three-month deficiency clock, and its two exceptions
Utah has a statute written specifically for this, and it is easy to miss because it sits in the statutes of limitations rather than in the foreclosure chapter. Utah Code 78B-2-313, "Action to recover deficiency after short sale," bars an action to recover a deficiency unless it is commenced no more than three months after the date the release of mortgage or reconveyance of trust deed is recorded following the short sale.
Statute: Utah Code 78B-2-313, amended by Chapter 278, 2013 General Session. Read September 5, 2026.
Read the conditions, because they are narrow. It applies to a loan for personal, family, or household purposes secured by single-family residential real property in Utah, and to a sale by the owner, with the lender's consent, that pays the lender less than the balance and results in the lender releasing the mortgage or reconveying the trust deed. An investment property held in an entity is a different conversation.
Two exceptions do the real damage:
- The three-month bar does not apply if the person obligated on the loan or the owner engaged in fraud in connection with the short sale.
- It does not apply to an agreement executed between you and the lender in connection with the short sale that obligates you to pay some or all of the deficiency. Sign a promissory note at the closing table and you have contracted around your own protection.
So the practical guidance does not change even though the law is friendlier than I first understood: get the release in writing, and read anything you are asked to sign for language that revives the balance. The Consumer Financial Protection Bureau puts it the same way, that you should ask the lender to waive the deficiency before going through with a short sale and keep the written waiver. The CFPB's explanation is here. Note also that this three-month limitation is a deadline to sue, not a cancellation of the debt, and it is a different rule from the fair market value cap in Utah Code 57-1-32, which applies to deficiencies after a trustee's sale rather than a short sale.
Who owns your loan also matters, and these are program rules rather than statutes:
| Loan owner | What the program says about the unpaid balance |
|---|---|
| Fannie Mae | Servicer must release the borrower from liability for the deficiency on a completed Fannie Mae short sale and provide the waiver at closing. The provision covers loans without mortgage insurance, and insured loans where the insurer delegated authority to Fannie Mae, so confirm your loan is in scope |
| Freddie Mac | Freddie states it will not pursue the borrower for the amount owed where the borrower acted in good faith and complied with its guide, with rights reserved otherwise |
| FHA | Under the Pre-Foreclosure Sale program the lien holders agree to release their liens and forgive the deficiency balance |
| VA | On loans closed after December 31, 1989 the veteran has no liability to VA for its loss absent fraud, misrepresentation or bad faith. That is not a release from every lender or junior creditor, and restoring the entitlement you used is a separate question |
Sources: Fannie Mae Servicing Guide D2-3.3-01; Freddie Mac Guide 9208.3; HUD Handbook 4000.1, Pre-Foreclosure Sale; 38 U.S.C. 3703(e). Program rules, not statutes, and current as of September 5, 2026.
The second mortgage is where people get hurt, because releasing a lien does not necessarily release you from personal liability for the debt. A junior lienholder can release its lien so the sale can close and still pursue you afterward. Under both Fannie Mae's and Freddie Mac's programs there is an aggregate allowance of up to $6,000 for eligible subordinate mortgage holders, and a junior taking that money has to waive its deficiency rights in writing. That is a program allowance, not a universal legal cap on what any junior lien can collect. If you have a second, that written waiver is the document the whole transaction turns on.
If you are already behind, the timing rules are conditional
Utah is a nonjudicial foreclosure state. Where the lender is a financial institution and the home is owner-occupied, Utah Code 57-1-24.3 requires the servicer to designate a single point of contact and send written notice with an itemized cure amount and a deadline no sooner than 30 days out before recording the notice of default. Once a notice of default is recorded, section 57-1-24 bars a sale until not less than three months have passed, and section 57-1-31 lets you cure and reinstate within that window. Notice of sale then requires publication three times over three consecutive weeks plus 20 days of posting and mailing.
Adding those together suggests roughly four to five months from the first pre-default notice to an auction, but treat that as illustrative arithmetic rather than your personal deadline. The periods overlap, no single statute states a total, and notices already served change the picture.
The statute also lets a borrower apply for foreclosure relief, and a pending application can affect timing. It is not a blanket stop. The protection depends on applying within the statutory window, submitting requested information on time, and whether you have applied before. Utah's Court of Appeals addressed this in Brimhall v. Ditech Financial LLC, 2021 UT App 34, which explains that a later application does not automatically restart the protection after a proper denial of an earlier one.
Separate federal servicing rules run on their own clocks, including a general restriction on making a first foreclosure filing until a borrower is more than 120 days delinquent, and additional protections when a complete loss mitigation application arrives more than 37 days before a scheduled sale, each with its own exceptions. Do not stack these together and assume you have bought yourself time. If you have a sale date, call your servicer and a counselor or attorney now rather than assuming a submitted application stopped it.
Short sale or foreclosure, if both are on the table
The clearest practical difference shows up when you go to finance another home. These are waiting periods only. Meeting one does not make you eligible; credit, the transaction, loan-to-value and individual lender overlays all still apply, and a recent short sale can push a file into manual underwriting.
| Loan type | After a foreclosure | After a short sale |
|---|---|---|
| Fannie Mae | 7 years, or 3 with documented extenuating circumstances | 4 years, or 2 with documented extenuating circumstances |
| Freddie Mac, manually underwritten | 84 months, or 36 with extenuating circumstances | 48 months, or 24 with extenuating circumstances |
| FHA | 3 years, with documented exceptions | 3 years, or none if every mortgage and installment payment was made within the month due for the 12 months before the short sale |
| VA | Generally 2 years, though shorter cases can be considered with reestablished credit and verified circumstances beyond the borrower's control | No published waiting period. VA says one may not be necessary where payments were unaffected and the borrower stayed in contact with the servicer |
Sources: Fannie Mae Selling Guide B3-5.3-07; Freddie Mac Guide 5202.1; HUD Handbook 4000.1; VA Pamphlet 26-7, Chapter 4. Standard periods with documented exceptions; read as of September 5, 2026.
The FHA line is the one that changes decisions. A homeowner who is short because of a job change but has never missed a payment can sometimes short sell and finance again without a waiting period, which is a materially different outcome from a foreclosure.
If you are the buyer looking at a short sale
If you are hunting distressed property in Southern Utah, short sales are the category to watch. See the current short sale listings in St. George and Southern Utah. That page pulls listings flagged as short sales in the Washington and Iron county MLS feed, so treat it as the live list rather than a census of every property in distress, and expect the count to move week to week.
Set expectations. The seller can accept your offer and the lender can still decline, so the contract carries a contingency making the sale subject to the mortgage holder's approval, and approval runs weeks to months. Fannie Mae and Freddie Mac both require the property to sit active on the MLS at least five consecutive days including a weekend, though they check at different points in the process. Fannie also imposes a deed restriction barring resale for 30 days and resale above 120 percent of the short sale price until 90 days after closing, so it is not a quick flip. And these homes are usually sold as is by a seller with no money for repairs, which makes your inspection more important rather than less.
Where to get help that is not a real estate agent
Foreclosure-prevention counseling from a HUD-approved agency is free, and worth doing even if you never call me. Other counseling services may carry a fee. The federal directory is at hud.gov/findacounselor and the line is 800-569-4287.
One local note. The HUD-powered directory lists Sun Country Home Solutions in St. George without mortgage delinquency and default resolution counseling among its displayed services, while Utah's state resource directory does list that service for the same agency. The listings disagree, so call and confirm what they currently offer rather than relying on either. Utah agencies that do list default counseling include the Community Development Corporation of Utah at 801-994-7222, NeighborWorks Mountain Country Home Solutions in Orem at 801-375-5820, and the Utah State University Family Life Center in Logan at 435-797-7224. Ask each whether they offer remote appointments.
I am a real estate agent, not a CPA or an attorney. The tax exclusion question and the deficiency language in an approval letter are the two places where being wrong is expensive. Take both to professionals who carry responsibility for the answer.
Questions I get about short sales in Southern Utah
Is a short sale still tax-free in Utah in 2026?
Generally it is taxable now, unless an exception or exclusion applies. The qualified principal residence indebtedness exclusion covers debt discharged before January 1, 2026, or discharged under an arrangement entered into and evidenced in writing before that date. Outside those, forgiven mortgage debt is generally taxable income federally, and Utah has no separate exclusion so it follows onto your state return. The insolvency exclusion and a qualifying bankruptcy discharge did not expire and can still apply.
Can the lender come after me for the balance after a short sale in Utah?
Utah Code 78B-2-313 bars an action to recover a deficiency unless it is commenced within three months after the release of mortgage or reconveyance of trust deed is recorded, for a consumer-purpose loan on single-family residential property in Utah. Two exceptions matter: it does not apply where the person obligated on the loan or the owner engaged in fraud, and it does not apply to an agreement you sign in connection with the short sale obligating you to pay some or all of the deficiency. It is a deadline to sue, not a cancellation of the debt, so still get the release in writing and read anything you are asked to sign.
Does a short sale hurt less than a foreclosure when I buy again?
Generally yes on timing. These are standard waiting periods and each has documented exceptions. Fannie Mae's standard is 7 years after a foreclosure against 4 after a short sale, with shorter paths for documented extenuating circumstances. FHA's standard is 3 years after a foreclosure, also with exceptions, and it can require no waiting period after a short sale if every mortgage and installment payment was made within the month due for the 12 months beforehand. A waiting period is not an approval; credit, loan-to-value and lender requirements still apply. The effect on your credit score is a separate question for your lender.
How much time do I have before a foreclosure sale?
More than most people assume, but it is not a fixed number. On an owner-occupied home with an institutional lender Utah requires written pre-default notice with at least 30 days to cure before the notice of default is recorded, then at least three months after that recording before a sale, then a notice of sale period with 20 days of posting and mailing. You can cure and reinstate within the three months. Federal servicing rules add their own timelines. If you have a scheduled sale date, contact your servicer and a counselor or attorney rather than relying on a general timeline.
Are there many short sales in St. George right now?
Short sales are the larger category here, which is why buyers hunting distressed property in Southern Utah should start there rather than with foreclosures. For the current number, my short sales page pulls listings flagged as short sales from the Washington and Iron county MLS feed. Treat that as the live list rather than a count of every property in distress, since not every distressed property is listed or flagged.
What if I am behind on payments but not underwater?
Then you may not need a short sale at all. If your expected proceeds after selling costs cover every payoff on the property, you can sell on the open market without lender approval, without a deficiency, and without cancellation of debt income, since the debt is paid in full. A sale can still raise ordinary capital gain questions. Having equity does not stop a foreclosure on its own, so if you are behind, act on the timeline rather than waiting.
Start with the number that decides everything
All of this turns on one calculation: your expected net proceeds after selling costs against every payoff on the property. If that number is positive you have a normal sale. If it is negative, then the tax exclusion question, the deficiency language and the timeline all matter, and the order you do them in matters too.
I will run that number with you at no cost and tell you straight which situation you are in, including when the answer is that you should not sell. Call or text me at 435-200-5508. You can also send me a message here. If you want to see what is on the market, my short sales page has the current listings, and my St. George market summary tracks what homes are selling for now. I am Lance Clifford, and I have sold real estate in St. George, Utah for thirteen years.
How to use this article. Everything above describes published sources as they read on September 5, 2026, and each one is linked so you can verify it yourself: the Internal Revenue Code and IRS guidance for the tax treatment, Utah Code 78B-2-313 for the deficiency limitation, and the investor program guides for Fannie Mae, Freddie Mac, FHA and VA. Those program rules are not law and can change without a statute changing. None of this is tax or legal advice, because advice requires knowing your numbers, your loan and your paperwork, and I do not. Two questions in particular turn on facts I cannot see from here: whether an exclusion applies to you, and what the deficiency language in your specific approval letter actually says. Before you sign a short sale approval, have those two read by someone who takes professional responsibility for the answer. If cost is the obstacle, HUD-approved foreclosure-prevention counseling is free and the IRS publishes its own guidance at no charge.