Hello again Parrot,
Your mother will not owe any tax
on this transaction
Even though this was a foreclosure, it will basically be treated the same as a sale of the home. Since box 5 is marked "yes" that means they had a recourse loan. With a recourse loan, the "sale price" is deemed to be the smaller of either the FMV or the outstanding loan balance. In your case the selling price would be $219,375.
Your mother needs to report this on Schedule D
as a sale of her personal
residence. She will show the sale price of $219,375 and then deduct from that her basis in the home (her original cost). If she has a gain, since this was her primary residence for more than 2 years, she can automatically exclude from the gain $250,000 ($500,000 if married filing
a joint return
Since the "selling price" itself is less than the exclusion she is allowed, she will owe no tax. However, the transaction needs to be reported on Schedule D, as the IRS
will be looking for you to report the receipt of that 1099A form.
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