I got foreclosure this year.
what should I do on my tax return? Should I expect any return?
Answers
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Hello,
Thanks for your question. When filing your tax return, consider two possible outcomes:
Cancellation of Debt (COD) Income: This may be taxable unless it's a non-recourse loan or qualifies for exclusion, such as insolvency or the principal residence exclusion. You would receive a form 1099-C, Cancelled Debt.
Reportable Gain: Foreclosures are treated like sales, but some or all of the gain may qualify for exclusion if it’s your personal residence.
If your foreclosure involves canceled debt, you'll need to report it as ordinary income only if you were personally liable for the mortgage, regardless of the lender’s security interest in the property. This amount will be reported in Box 2 of the 1099-C form sent by your lender.
You’ll also need to calculate any capital gain from the foreclosure. To do this:
- Find your tax basis in the home (usually the purchase price plus home improvements).
- Subtract your tax basis from the home’s fair market value or, if you weren’t personally liable for the remaining debt, use the mortgage balance at the time of foreclosure.
Whether you receive a refund depends on your overall tax situation, including other income, credits, and withholding.
You can read more about this topic on this IRS website on Home Foreclosure and Debt Cancellation
