About Taxes: Foreclosures and Canceled Debts
 | from William Perez
The prospect of losing a house due to foreclosure sounds bad enough as it is. But there are also tax implications to consider as well. Foreclosures are considered a sale, and so there could be capital gains to report. Additionally, houses are typically sold for less than the loan balance, which could generate canceled debt income.
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How Foreclosures are Taxed
Foreclosures, repossessions, and short sales can generate capital gains income. Figuring the gain on a foreclosure can get tricky, as you will need to know whether your loan is a recourse or a non-recourse loan.
| | Canceled Debt Income
Canceled debts are considered taxable income. But the tax law excludes certain types of debt forgiveness. Most noteworthy is that mortgage debt can be excluded from taxable income, up to $2 million.
| Taxes When a House is Sold
Foreclosed properties can qualify for tax-free capital gains of up to $500,000 for married couples and of up to $250,000 for unmarried persons. To qualify, you'll need to have lived in the house as your primary residence for at least 24 months.
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