If you are involved in mortgage foreclosure, you may have to report capital gains or losses on your tax return. Your reporting obligations vary depending on whether you are the property owner or the lender.

Personal-use Property Foreclosure

If you lost your home or principal residence due to a mortgage foreclosure, you cannot claim a Capital Gain or Loss on your personal income tax return. However, if a property you owned for business purposes was foreclosed upon, you may be able to claim losses suffered or income gained.

For example, if you do not pay your mortgage and your home or a personal-use vacation home is claimed by the bank through foreclosure, you cannot claim the loss on your taxes. However, if you lost a rental property through foreclosure, that property is considered a business property, and losses or gains can be claimed on your tax return.

Capital Gains or Losses Due to a Mortgage Foreclosure

If a bank forecloses on one of your business properties and you are left with a debt, you may be able to report that as a capital loss on your tax return. Similarly, if the bank sells the foreclosed property for more than you owe and you earn money through the transaction, you must report that income as a capital gain.

Report both losses and gains on Schedule 3 – Capital Gains and Losses of your tax return. If the foreclosed properties were Qualifying Fishing or Farming Properties, you must report them on line 12400 of the special section of Schedule 3 related to those types of properties.

Effect of Foreclosure Capital Gains on Tax Credits

If you report capital gains due to a mortgage foreclosure on your tax return, they are not included when calculating your net income. As a result, capital gains due to foreclosures do not affect the GST/HST sales tax credit or the Canada Child Benefit (CCB) calculation. Nor do they affect social income repayment taxes.

For example, capital gains from property foreclosures do not affect the Old Age Security (OAS) Pension Recovery Tax (Clawback). This tax requires pensioners who earn over a certain threshold to repay a portion of their OAS payments. If a capital gain from a foreclosed property brings your net income above the threshold, you do not have to pay the recovery tax, as capital gains due to foreclosures are excluded from net income calculations for this tax.

Mortgage Foreclosures and Mortgagees

If you are the mortgagee, the person or institution who loaned the money, you experience a foreclosure from the opposite side. If you repossess a property from one of your borrowers, you own the property. You do not have to declare the repossessed property as an asset, instead you must wait until you sell the property to claim a capital gain or loss.

For example, if you repossess a property in October but you do not sell it until May of the following year, you claim the gain or loss on your tax return for the year including May.

What Edition of TurboTax Is Right for Me?

Whether business income, rental property or capital gains, TurboTax has the right software for you Answer a few simple questions on our product recommender and we can help guide you to the right edition that will reflect your individual circumstances.

You can always start your return in TurboTax Free, and if you feel the need for additional assistance, you can upgrade to any of our paid editions or get live help from an expert with our Assist & Review or Full Service*. But don’t worry, while using the online version of the software when you choose to upgrade, your information is instantly carried over so you can pick up right where you left off.

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