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The foreclosure transaction itself - reportable on 1099-A - http://www.irs.gov/pub/irs-pdf/f1099a.pdf should be treated as disposition of the property at the sale price.
The capital gain/loss is calculated as (selling price) - (basis - that is mainly purchase price with some adjustments)
The loss on personal property is not deductible. The gain is taxable, but if the property was used as a primary residence at least two out of five years - you may exclude the gain from taxable income (up to $250,000 for singles)
If you negotiate with the creditor and all or part of the debt is forgiven or the debt would be canceled under bankruptcy protection procedure - you are sent the form 1099-C.
California law provides that in case of foreclosure or short sale of the primary home - homeowners may not be held liable for deficiency - that is a luxury of living in California.
However - your credit report will be damaged. See more details and examples in this article - http://www.gibsonlawcaliforniarealestate.com/deficiencies-when-is-a-debt-still-owing-after-foreclosure.html
The amount of debt forgiven is reportable on 1099-C - http://www.irs.gov/pub/irs-pdf/f1099c.pdf - generally is taxable, unless an insolvency exemption apply -- you should file a form 982 - to proof your insolvency - and might exclude all or part of canceled debt from taxable income.
The Mortgage Forgiveness Debt Relief Act of 2007 allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence. You still need to file the form 982 to claim the exclusion.
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Yes - these new rules are based on the Mortgage Forgiveness Debt Relief Act of 2007 allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.
You still need to file the form 982 to claim the exclusion.
However - the federal law doesn't require creditors to forgive the debt.