If a lender acquires your property through a foreclosure and evicts you or if you abandon your property before the eviction occurs, the lender will send you an IRS Form 1099-A Acquisition or Abandonment of Secured Property or an IRS Form 1099-C Cancellation of Debt. These forms provide the information you need to report a gain or a loss on the foreclosed property on your federal income tax returns.
Taxes and Foreclosures
When a lender forecloses on your property, the IRS treats the foreclosure the same as it would if you had sold your home. Your lender sends you a Form 1099-A if it foreclosed on your property in one year, but did not cancel your mortgage debt until the following year. If the lender foreclosed on your property and forgave the mortgage debt in the same year, it only needs to send you a Form 1099-C, Cancellation of Debt.
A recourse loan is one for which the lender holds you personally responsible for the loan and can legally pursue you for the outstanding balance owed. You must report the canceled debt resulting from the foreclosure as income on your federal taxes. You may also have to report a capital gain or loss resulting from the foreclosure. A nonrecourse loan is one for which you are not personally responsible and the lender cannot legally pursue for the outstanding balance of your loan. You must report a capital gain or loss resulting from the foreclosure on your federal tax returns. You do not have to report the canceled debt as income for nonrecourse loans. You must check with your state laws to determine whether you live in a recourse or nonrecourse state.
Regular Income Reporting
If you live in a recourse state, the amount of income you report because of a foreclosure is the outstanding loan balance minus the foreclosure sale proceeds. You report this amount as regular income and the IRS taxes the money accordingly. You can also choose to report the fair market value of the home as income. In this case, you would use the FMV of the property when ownership transferred to the lender and not the FMV at the time you purchased the property. Regular income from canceled debt only applies to recourse loans.
Capital Gains and Losses
To determine if you have a gain or loss resulting from the foreclosure, you must know your balance due at the time of foreclosure and the FMV of the property. You can find these amounts on your 1099-A. You must also calculate your adjusted basis. The adjusted basis is the loan amount minus the cost of any improvements you made, depreciation or any damage to the property that affects its value. To calculate a gain, you subtract your adjusted basis from the amount of your canceled debt, often referred to as the amount realized. To calculate a loss, you subtract the amount of your canceled debt from adjusted basis.