Are Surplus Funds Taxable?

Federal Income Tax

Surplus funds are generally a return of your equity, not income, so no federal income tax is due under IRS Publication 523. The IRS treats the foreclosure sale as the disposition; any taxable gain or loss is calculated there—not when the surplus is released.

State Income Tax (New Jersey)

New Jersey follows the federal treatment. Surplus funds qualify as non‑taxable capital recovery unless the property was held for business or rental use and depreciation recapture applies.

1099‑A and 1099‑C Forms

The foreclosing lender issues Form 1099‑A (and sometimes 1099‑C). These relate to cancellation of debt—not surplus funds. Retain them for your tax preparer but they do not change the surplus‑fund analysis.

Consult Your Accountant

While most clients pay $0 tax on surplus funds, unique situations (investment property, prior depreciation, insolvency tests) warrant professional review.

Past results do not guarantee future outcomes. Attorney Advertising. Friscia & Associates LLC | 199 Wilson Ave., Suite A, Newark, NJ 07105.