Tax law treats foreclosure as a sale of your home. If you sell your home, you have a gain or loss.
Gains are taxable, except for those amounts you may exclude using the $250,000 home-sale exclusion ($500,000 for qualifying joint returns).
Losses on a foreclosure or other sale of your personal home are not deductible.
You may have a mortgage for which you are personally liable. This is called a “recourse mortgage.” A foreclosure on a recourse mortgage can produce immediately taxable cancellation of debt income. This can happen even when you have a loss on the foreclosure transaction. Nice thought: lose money, pay taxes.
If debt is restructured (say the old $250,000 mortgage is cancelled because you agreed to a new $230,000 mortgage with a different payment schedule), you have cancellation of indebtedness income equal to the reduction in face value of the mortgages ($20,000 of taxable income in this example). This is true regardless of the ... Log in to view full article.