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Was the house Foreclosed by the lender? The IRS views the foreclosure of a property as a sale. The gain or loss is calculated on the difference between:
Additionally, if the bank cancels your debt, meaning you no longer need to pay it back, then any amount of debt cancelled which is in excess of the fair market value of the house, is part of your ordinary taxable income. This ordinary income is separate from the gain or loss you calculate on the foreclosure of the home. The bank should have sent you a form 1099-C. I have included additional information. The Article on Foreclosure below, also contains additional links to other articles.
Publ 544 Article on foreclosure
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