CCH Announces- "Tax Consequences of Home Mortgage Foreclosure"
CCH INCORPORATED

The following is a discussion regarding the tax consequences to the homeowner as a result of a foreclosure. The CCH has produced an explanation of the interaction between the COD provisions and exceptions under 61(a)(12) and 108 as well as the gain exclusions for principal residence under 121. 

1. Special relief provisions that could potentially ease tax liability.
2. Cancellation of Debt. Forgiveness of a mortgage loan typically results in cancellation of taxable debt income. There are instances where cancellation of debt income is not taxable (for example: bankruptcy, insolvency, qualifying farm debts, and non-recourse loans).
3. Gain from Home Mortgage Foreclosure. Foreclosure of property is regarded as a sale or exchange. The difference of a property's fair market value (or non-recourse debt) exceeds its basis is a taxable gain. However, the gain is excludable up to $250,000 ($500,000 for joint filers) if the property was owned and used as the principal residence for two of the previous five years.
4. Offers in Compromise. A partial abatement of the tax on foreclosure if the IRS is willing to enter into an offer-in-compromise.

Please refer to the CCH’s ClientRelate Bulletin for information on who may be affected by this guidance.

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