The original mortgage doesn't factor into the calculation of the gain/loss. You might be able to exclude a gain. If you can exclude all of the gain, you don't need to report the sale on your tax return, unless you received a Form 1099-S, Proceeds From RealEstate Transactions.
The IRS has a provision that can help
homeowners avoid capital gains on the sale of their primary
residence.
To qualify, you must have owned your home and used it as
your main residence for at least two years in the five-year period before you
sell it. You also must not have excluded another home from capital gains in the
two-year period before the home sale. If you meet those rules, you can exclude
up to $250,000 in gains from a home sale if you’re single and up to $500,000 if
you’re married filing jointly.
If you can't exclude it, the amount of the proceeds from the sale of your home that you use to pay off the mortgage isn't a factor in figuring your taxable amount for the sale.
Take any cash or other property you receive plus any of your indebtedness the buyer assumes or is otherwise paid off as part of the sale, less your selling expenses, less your adjusted basis in your home, you have a capital gain on the sale.
Your adjusted basis is generally your cost in acquiring your home plus the cost of any capital improvements you made, less casualty loss amounts and other decreases.
Don't report a loss, it isn't deductible. Click on this IRS link to read more: Property (Basis, Sale of Home, etc.)
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