Usually, no, the surplus funds are not automatically classified by the IRS as some special category. Based on IRS guidance, a forced property disposition is generally analyzed under the normal sale/disposition rules, and in foreclosure-type situations the IRS says gain or loss is figured the same way as a sale. The proceeds you receive from the sale are part of the amount realized.

So the short-term vs. long-term answer usually depends on your holding period for the property, not on the fact that the money came to you as "surplus funds." The IRS says capital gain is generally long-term if you held the asset more than 1 year, and short-term if you held it 1 year or less.

Also, the taxable gain is not necessarily equal to the surplus check itself. Federal tax treatment is based on gain over adjusted basis. In other words, you generally compare the total amount realized from the sale/disposition against your adjusted basis in the property. For personal-use property, losses are generally not deductible.

Two big exceptions matter. If this was your principal residence, some or all gain may be excluded under Section 121 if you meet the ownership and use tests.

If it was rental or business property, part of the gain can be treated differently because depreciation recapture and Section 1231 rules may apply, so it is not always pure capital gain from top to bottom.

So the practical answer is:

If you owned the property more than 1 year, the gain portion is generally long-term.

If 1 year or less, generally short-term. But you should not assume the entire surplus distribution equals taxable capital gain. The basis, use of the property, and any depreciation taken all matter.