You may have to report
your home foreclosure as taxable income on your tax return.
For years 2007 - 2012:
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation applies to debts forgiven in calendar years 2007 through 2012.
Under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers generally can exclude income from the discharge of debt on their principal residence or mortgage restructuring. This exception does not apply to second homes or vacation homes. In some cases, you may be able to file an amended tax return for previous tax years. For more information, see
The Mortgage Forgiveness Debt Relief Act and Debt
Cancellation.
For years PRIOR to
2007 and AFTER 2012:
This determination requires a multi-step process.
Home
Foreclosure - Step 1
You must determine whether you have taxable income
that you must report on your tax return from the discharge of
indebtedness caused by you home foreclosure.
You have taxable income that you must report on your tax return from the discharge of indebtedness
caused by your home foreclosure if you are personally liable on the
debt and the debt discharged exceeds the fair market value of the property at the time of
the home foreclosure. Discharge of indebtedness income is taxable as other income on
Form 1040, Line 21, of your tax return.
You may have received either
a Form 1099-A or Form 1099-C, or both.
You may be able to exclude
from your tax return discharge of indebtedness income caused by your
home foreclosure if you have filed
bankruptcy; are insolvent; or have a qualified farm debt. See
IRS Publication 908,
Bankruptcy
Tax Guide, and Form 982, Reduction
of Tax Attributes Due to Discharge of Indebtedness for more tax information.
Home Foreclosure - Step 2
You may also have to compute
taxable gain or loss and include it on your tax return on disposition of
your home through home foreclosure. Gain or loss
is the difference between your adjusted basis in the property and the amount
realized through the home foreclosure,
even if you received no cash or property in the home foreclosure "sale" transaction. You must
still follow this step even if you have no discharge of indebtedness income
included on your tax return from step one.
The difference between the amount realized less any reportable discharge of indebtedness
income from the home foreclosure sale and your adjusted basis is your tax gain or
loss you must report on your tax return. If the property is business property,
report it on Form 4797, Sales
of Business Property, and follow the normal rules. If the property is a personal
home, report it on Form 1040, Schedule D, following the normal rules for sale of a main home.
If you repossess your property after making an installment sale, see
IRS Publication 537, Installment
Sales, under "Repossession" for special tax rules for computing your
tax gain or
loss on your tax return and the new tax basis in the repossessed property.
