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 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 of your tax return. If the foreclosed properties were qualifying fishing or farming properties, you must report them on line 124 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 your ability to earn goods and services tax/harmonized sales tax credits or the Canada child tax benefit. Nor do they affect social income repayment taxes.
For example, capital gains from property foreclosures do not affect the old age security pension recovery tax. 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. However, you do not have to declare it 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.