Even a foreclosure may qualify for a sale of your main home. Your mother may qualify for the first $250,000 in gain on the sale of the main home being tax-free.
IRS Publication 4681 page 4 states:
Recourse debt
If you owned property that was subject to a recourse debt in excess of the fair market value (FMV) of the property, the lender's foreclosure or repossession of the property is treated as a sale or disposition of the property by you and may result in your realization of gain or loss.
That income is free and clear as long as:
- You owned the home
- It was your main home for two years or more within the five years leading up to the sale
- You waited at least two years between selling your primary home and excluding your first $250,000 or $500,000 from taxes. In other words, you may buy and sell as many primary homes as you'd like, but you'll only get this tax benefit every two years.
In TurboTax Premier or above, follow these directions.
- Down the left side of the screen, click Federal.
- Down the left side of the screen, click Wages & Income.
- Scroll down to Less Common Income, click Show more.
- Click Start to the right of Sale of home (gain or loss).
- Follow the directions.
See also this TurboTax Help.
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