- 1). Add the total cost of improvements to the total amount of debt securing the home directly before the foreclosure occurred. This is the adjusted cost basis. For example, if you had $250,000 worth of debt securing the home right before foreclosure and completed $30,000 worth of repairs while you owned it, your adjusted cost basis is $280,000. Examples of improvements include kitchen renovations, new windows and siding or a new roof.
- 2). Subtract the result from Step 1 from the fair market value of the home to calculate the gain (if there is one). The lender reports the fair market value of the home to you on Form 1099-C, according to the IRS. If you have not yet received Form 1099-C from your lender, contact your lender to get the fair market value of the home. If the home was sold, this most likely will be the foreclosure sale price. If the result from Step 1 is greater than the fair market value, your "gain" is 0. Do not report a negative number.
- 3). Report the total gain (or zero) from Step 2 to the IRS on your income taxes. If the home was sold for more than your cost basis, then you must report the gain---it may not be taxable. If you owed and spent more on it than it was worth when it foreclosed, then report zero gain. You may not be required to pay taxes on the forgiven debt, depending on when you purchased the home, among other factors.
- 4). Consult a tax advisor. The advisor will be able to calculate your deficiency precisely and will let you know if you owe income taxes on the foreclosure.
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