September 22nd, 2008 by Reed Allmand 
A foreclosure could subject you to tax liability. Never overlook this aspect of foreclosure. The tax rules are complex, and subject to interpretation. The Internal Revenue Service will treat a foreclosure as a sale and you will receive a Form 1099C for the amount your lender or a third party bids at the foreclosure sale. You could end up with a tax liability if you have realized gain from the sale. The rules are complex and you should consult a specialist. Many in foreclosure do not realize that that may have to pay tax on a house that they lose through foreclosure.
Even if your home is not sold in foreclosure, but you give your lender a deed in lieu of foreclosure, you could still be subject to tax liability. This is because the deed in lieu of foreclosure results in debt forgiveness. There could be ways for you to minimize or eliminate such tax liability by careful planning with the help of a qualified tax professional.
To calculate the debt cancelled for tax purposes, you must subtract the fair market value of the property from Form 1099-C, box 7 from the total amount of the debt immediately prior to the foreclosure.
To calculate the gain from foreclosure, subtract the adjusted basis in the property – usually the purchase price plus the cost of any major improvements from the fair market value of the property foreclosed.
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 in your returns. Losses from the sale or foreclosure of your home are not deductible.
About Reed Allmand
Allmand's vision is rooted in his own financially precarious childhood in Abilene "My father always had difficulty holding a job and supporting our family, so after my parents divorced when I was 12, my sister and I got jobs to help make ends meet," he recalls. "I remember what it felt like as a child to worry that our car would be repossessed or home foreclosed on."
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