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If your Home is Disposed of Other than a Sale

Posted by attorney Henry Lively

Dispositions Other Than Sales

If your home is disposed of other than in a traditional sale, such as in a foreclosure, or short sale - special rules will apply. The IRS still considers this disposition a sale and you will have to calculate whether you have a gain or loss on the disposition of your home.

** Foreclosure or repossession.** If your home was foreclosed on or repossessed, you have a disposition as noted above. In most cases, you figure the gain or loss from the disposition the same way as gain or loss from a sale. But the selling price of your home used to figure the amount of your gain or loss depends on whether you were personally liable for repaying the debt secured by the home, as shown in the following chart provided by the IRS: IF you were... THEN your selling price includes... not personally liable for the debt the full amount of debt canceled by the foreclosure or repossession. personally liable for the debt the amount of canceled debt up to the home's fair market value. You may also have ordinary income, as explained next. Note: If you had non-recourse debt there can be no cancellation of debt income. However, if you have recourse debt and you repay less than the amount owed to the lender you will have cancellation of debt income. Ordinary income. If you were personally liable for the canceled debt, you may have ordinary income in addition to any gain or loss. If the canceled debt is more than the home's fair market value, you have ordinary income equal to the difference. Report that income on Form 1040, line 21, or on Form 1040NR, line 21. However, the income from cancellation of debt is not taxed to you if the cancellation is intended as a gift, a discharge of qualified principal residence indebtedness, or if you are insolvent or bankrupt. If you have cancelled debt you will have to include a form 982 with your Form 1040 to show how you handled the debt, adjusted the basis on the assets, and whether you met any of the exceptions to including the cancelled debt in your income. If you have canceled debt you will receive Form 1099-A, Acquisition or Abandonment of Secured Property, from your lender if your home is transferred in a foreclosure. This form will have the information you need to determine the amount of your gain or loss and any ordinary income from cancellation of debt that is not a discharge of qualified principal residence indebtedness. If your debt is canceled, you may receive Form 1099-C, Cancellation of Debt.

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