It depends.
Forgiveness of a non-recourse loan resulting from a foreclosure does
not
result in cancellation of debt income, but it
may
result in taxable income. A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral.That is, the lender cannot pursue you personally in case of default. To figure your gain from foreclosure, if any,
- Take the fair market value of the property foreclosed. (For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure.)
- Then, subtract your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements)
- If less than zero, your gain or loss is zero. If this is a positive number, this is your gain from the foreclosure of your home.
If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income. If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D of your return.
You may wish to report this transaction on your taxes, if only to show the exclusion from taxation, if the exclusion applies. Here's how to Amend
My Return in TurboTax.
