Tax implications on a foreclosure

I have a home I’ve been trying to sell for several years. I may have to
foreclose or give the deed back to the lender. Tried to sell, and trying to
short sell but time is running out and buyer looks like he might walk away. I’d
like to know what my tax implications will be. While I was still in that house
and had it up for sale, I was under contract with another house which I ended up
having to buy while still tryin to sell the previous one.

Asked on July 6, 2016 under Real Estate Law, Florida

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 4 years ago | Contributor

Being foreclosed on does not directly have a tax implication, since even if the house is foreclosed upon, you are still potentially liable for any unpaid amounts due on the mortgage. But if any part of the loan is foregiven or written off by the bank (e.g. say there's $500k left on the loan and they get $300k for the house at the sheriff's sale or auction; if they forgive the remaining $200k, that's where you could have tax implications). Any amount forgiven on a debt counts as income (mathematically and legally, being forgiven $1 so you don't have to pay it is the same benefit as earning $1), so you'd have to pay income tax on that.
Based on what you write, neither home is an investment property: they are both your primary residence and you have simply, unfortunately, been caught between them. 


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