Foreclosures
Tax Consequences of Foreclosure
One of the worst things that can happen to people financially is to have their homes taken from them in a foreclosure proceeding. What many people don't know is that they may owe significant income taxes due to the foreclosure.
For tax purposes a foreclosure is a sale of the property with the sales price being the current balance on the mortgage. If your basis in the home is less than that mortgage, then you have a gain on the "sale".
If you have bought and sold homes before and deferred your prior gains into your current home or if you have owned your home for a long time and refinanced it as its value has gone up you probably have a mortgage which is in excess of your basis.
The last thing someone needs to hear after losing their home is they owe substantial income taxes.
This concept of a "foreclosure sale" also applies to any other property including residential and commercial properties.
Some or all of the tax consequences can be overcome with some careful planning, but the first step is to be aware that this problem exists.