The Tax Consequences of Foreclosure

Dealing with foreclosure consequences is stressful and confusing. One thing that many people fail to consider during a foreclosure is the tax consequences that come with it. Here are a few things to consider about the tax consequences of foreclosure.

Sale Proceeds

When the bank decides to foreclose on your home, this is treated as a sale of the property by the IRS. Regardless of whether or not the sale was forced, it was still a sale. Therefore, you are responsible for the tax liability, if there was any gain on the sale. If you lived in your home for over two years, you will not have to pay capital gains tax on the sale. However, if you have been in the home less than two years, you might have to pay taxes on the profit.

Cancellation of Debt

In addition to paying taxes on sale proceeds, you will be responsible for the cancellation of debt as well. If the home is worth less than what you owe against it, the bank will essentially be canceling this amount of debt. Therefore, this is basically like getting free money because you borrowed the money and did not repay it. You are basically responsible for paying the difference.