You may have received either a Form 1099A (PDF), Acquisition or Abandonment of Secured Property, or Form 1099C (PDF), Cancellation of Debt, or both. You may not have to report gain on the sale of property and, depending on the circumstances, you may have cancellation of indebtedness as well. You have cancelled debt income if the debt cancelled, as a result of the foreclosure and it exceeds the fair market value of the property at the time of he transfer. Cancelled debt income is taxable as other income on line 21 (other income) of Form 1040 (PDF). Refer to Publication 544, Sales and Other Disposition of Assets. Complete Table 1-2, Worksheet for Foreclosure & Repossessions to determine if there is income from cancellation of debt or gain or loss from foreclosure or repossession.

You may be able to exclude all or part of the cancelled debt income if all or part of the debt was discharged in bankruptcy; if you were insolvent immediately before the transfer; or if the debt is a qualified farm debt or qualified real property indebtedness. Refer to Publication 908, Bankruptcy Tax Guide.

You may be required to compute gain on the disposition of the property and, under certain circumstances, may be eligible to claim a loss as well. The tax treatment of he disposition may be affected by whether the debt was recourse or nonrecourse.

If the debt was nonrecourse (you were not personally liable for payment), the amount realized for purposes of computing gain is the sum of the amount of money received, the fair market value of any other property received incident to the transfer of the property subject to foreclosure, and the amount of any nonrecourse debt on the property. The difference between the amount realized and your basis is your gain or loss. No portion of the gain on property subject only to nonrecourse debt is income from discharge of indebtedness.

If the debt was recourse (you could have been held personally liable for payment), the proper treatment depends on the amount of the debt and whether you were discharged as a result of the transaction. If the debt was less than the fair market value of the property, the amount realized is equal to the sum of the amount received and the fair market value of any other property received incident to the transfer of the property subject to foreclosure, and the amount of any debt discharged as the result of the transaction. On the other hand, if the debt was more than the fair market value of the property and it was discharged as result of the transaction, for example, if you gave the creditor a deed in lieu of foreclosure, then the difference between the FMV of the property and the amount of the debt up to the FMV of the property is considered to be the amount realized and the excess debt is considered to be income from discharge of indebtedness. Your gain or loss would be computed by the difference between the FMV of the property and your basis; the balance would be ordinary income reportable on Line 21. If the debt was not discharged because of the foreclosure and the creditor could collect the difference from you, there would be no discharge of indebtedness income until such time as the debt was actually discharged or the statute of limitations expired. In such case, you might only have to report your gain on the disposition of the property.

References:

• Publication 523, Selling Your Home
• Publication 537, Installment Sales
• Publication 544, Sales and Other Dispositions of Assets
• Publication 908, Bankruptcy Tax Guide
• Form 982 (PDF), Reduction of Tax Attributes Due to Discharge of Indebtedness
• Form 1040 (PDF), U.S. Individual Income Tax Return
• Form 1040, Schedule D (PDF), Capital Gains and Losses
• Form 1099A (PDF), Acquisition or Abandonment of Secured Property
• Form 1099C (PDF), Cancellation of Debt
• Form 4797 (PDF), Sales of Business Property

The foreclosure or repossession is treated as a sale or exchange from which you, the borrower, may realize gain or loss. However, if you realize a loss on personal use property, such as your residence, the loss is not deductible. Refer to Publication 544, Sales and other Dispositions of Assets, and Publication 908 (PDF), Bankruptcy Tax Guide, for more information.

References:

• Publication 908 (PDF), Bankruptcy Tax Guide
• Publication 544, Sales and other Dispositions of Assets