The IRS requires you to report the gain or loss on a foreclosure on your tax return.
If your rental house is foreclosed on, the IRS views it as a sale. This requires you to report the gain or loss you incur on your tax return.
the foreclosure increases the complexity of the transaction for tax reporting purposes since you must consider other factors, such as whether you are still responsible for any remaining mortgage debt after the bank takes possession of the rental house.
The IRS requires you to report the foreclosure and the resulting gain or loss on a Form 4797. If the foreclosure results in a long-term capital gain, then you also need to include the amount on a Schedule D attachment to your personal tax return.
For further information please see the TurboTax website: How to Report a Foreclosed Rental House on Your Taxes
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