I lost my home through foreclosure. Are there tax consequences?

The simple answer is “maybe”.

 

There are two possible consequences you must consider: 

Taxable cancellation of debt income. (Note: The cancellation of debt income is not taxable in the case of non-recourse loans.  Idaho is a recourse state.)

  • Non-recourse means that the only recourse a lender has in foreclosing is the property (California is a non-recourse state).
  • Recourse means that the lender has both the property and any other asset you may have available as a means of collecting a debt.  See previous post about deficiency judgment for more details.

A reportable gain from the disposition of the home (because foreclosures are treated like sales for tax purposes). (Note: Often some or all of the gain from the sale of a personal residence qualifies for exclusion from income.)

  • The key point her is that foreclosures are treated like sales for tax purposes.  This often overlooked by people facing this situation and thus they forget to anticipate this potential liability.

To see if you have any taxable gain follow this link to the IRS.gov web site for the calculation. 

Posted by DarrinJ at 5/19/2009 1:26:00 PM
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