You can have canceled debt income from the foreclosure with this type of loan as well, in addition to a capital gain. Mortgages used to acquire homes are typically non-recourse loans, while refinanced loans and home equity loans tend to be recourse loans. This isn't an absolute rule, however. It can also depend on the laws of the state in which you reside. A non-recourse loan is one where the borrower isn't personally liable for repayment of the loan.
The loan is considered satisfied and the lender can't pursue the borrower for further repayment if and when it repossesses the property. The figure used as the sales price in this case is the outstanding loan balance immediately before the foreclosure. The IRS takes the position that you're effectively selling the house back to the lender for full consideration of the outstanding debt, so there's generally no capital gain. You won't have any canceled debt income with a non-recourse loan, either, because the lender is prohibited by law from pursuing you for repayment.
You'll receive one of two tax forms after foreclosure, or perhaps both:. You can determine the sales price after you've determined what type of loan you had on your property. Report the foreclosure on Schedule D and Form if the foreclosed property was your primary residence. You can still qualify for an exclusion from capital gains tax under the modified rules for calculating your gain or loss if the foreclosed property was mixed-use—it was your primary residence at one time and a secondary residence at another time.
The rules are also relaxed somewhat for members of the Armed Forces. As of tax year , the tax return you'd file in , the rate on long-term capital gains for properties owned one year or longer depends on your overall taxable income and filing status.
These long-term capital gains income parameters are different from those that were in place before The TCJA assigned long-term capital gains their own brackets.
It's a short-term capital gain if you owned your home for less than a year. Summary of Federal Tax Law Changes for Taxes and Reducing Debt. Estimate your tax refund and where you stand Get started.
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Learn what education credits and deductions you qualify for and claim them on your tax return Get started. The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice.
Skip To Main Content. Housing and Economic Recovery Act Beyond the traditional insolvency exception, you may qualify for additional help under the Housing and Economic Recovery Act and its subsequent extensions. Ask yourself two questions: Is the foreclosure occurring on your principal residence?
Is your mortgage debt restricted to the purchase and improvement of your home? It depends on if:. The foreclosure itself is treated as a sale of the home. So, you might need to report it on Schedule D. You should receive Forms A with information about the sale. On a nonrecourse loan, the amount realized on the sale is the full amount of the debt outstanding.
Your forgiven mortgage debt and income gained from refinances or HELOCs might also be taxable at the state level. California, for example, isn't currently taxing forgiven mortgage debt but does tax the income from any cash-out refinances and HELOCs. Taxable income resulting from forgiven mortgage debt and any cash-out refinances or HELOCs has to be declared in the year in which the foreclosure occurred. IRS taxation waivers of forgiven mortgage debt apply only to principal residences.
However, money taken from a cash-out refinance or HELOC that's applied to home renovation or improvement is often tax-exempt after foreclosure. Also, ensure the federal income reporting document Form your mortgage lender gives you after your foreclosure is accurate. Federal law considers debt discharged in bankruptcy, including potentially taxable forgiven mortgage debt, to be non-taxable as a result.
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