Do I have to pay tax on my home foreclosure?

You may have to report your home foreclosure as taxable income on your tax return. 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.

Related tax information about home foreclosure

Tax Directory Topics:
Income Related Questions and Answers

IRS publications about home foreclosure:
For further tax information about a home foreclosure see IRS Publication 523,

Selling Your Home, and IRS Publication 544,

Sales and Other Dispositions of Assets, for more information. Also see IRS Publication 17,

Your Federal Income Tax. Please read this IMPORTANT Editor's Note regarding navigating IRS publications with Adobe Acrobat Reader.
IRS publications can also be ordered by calling 1-800-829-3676.

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