Let's say you bought the house for $100,000 and you have a basis of $200,000 on your house on account of qualifying repairs you made on the house. (Remember that basis = purchase price plus qualifying repairs). So your basis is $200,000 and the selling price is $100,000 (fair market value). The question is, what is your capital gain?
Well, remember that capital gain = Sales price minus basis.
Remember also that your sales price is the lesser of two things: the fair market value, or the amount of the debt forgiven plus any cash (as in cash for keys).
In this case, the fair market value is $100,000. So your selling price $100,000 minus your basis $200,000 equal negative 100,000.
You have a loss!
Well, you pay taxes on a gain. You would think you can deduct a loss on your taxes?
You would be wrong. You cannot deduct capital losses on your home after a foreclosure even if you are taxed on the capital gains.
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