How are foreclosures (and deeds in lieu of foreclosure) taxed?
An important consideration in the results of a foreclosure (or a deed in lieu of foreclosure) is whether the debt is “recourse” or “nonrecourse.” If the debt is “recourse,” the debtor is personally liable for the debt. If the debt is “nonrecourse,” the debt is only secured by the property, and the debtor is not personally liable for the balance. You should consult with an attorney to determine the status of your mortgage. In California, most mortgages that are used to purchase a residence are nonrecourse, but mortgages from refinancing a previous mortgage are usually recourse. When a nonrecourse mortgage is foreclosed, the property is treated as being sold for the balance of the mortgage.2 This is important because the gain from a foreclosure of a principal residence may be eligible for the $250,000 ($500,000 for jointly-owned marital property) exclusion. For example, for foreclosure of a nonrecourse debt, Nonrecourse debt $500,000 Tax basis (cost to determine tax gain or loss) 300,000
