Non-recourse

• With a non-recourse loan, the homeowner does not owe the bank any extra money on the mortgage after the foreclosure, even if the sale of the house does not cover the full value of the mortgage. The bank writes off the loss because it does not have the right to take other assets from the homeowner to repay the loan. A non-recourse loan can produce a positive amount realized, creating taxable income for the borrower.
  
  

Recourse

• Some banks require recourse loans. When the homeowner has a recourse loan, the bank has recourse to other collection methods to collect the full mortgage value. The bank can place a lien on other real estate properties the debtor owns, garnish the homeowner's wages, and repossess other assets such as the homeowner's car. If the house sells for less than the value of the mortgage and it is subject to a recourse loan, the homeowner has a negative amount realized, and the homeowner reports a loss from the home sale when filing a tax return.
  
  

Fair Market Value

• The fair market value of the house determines the amount of the foreclosure gain or loss. For the amount realized calculation, the fair market value is the value that the house sells for during the foreclosure sale. The bank may sell the house at a low price so it sells quickly and the bank does not have to deal with property management, which can produce a large difference between the sale price and the mortgage value.
  
  

Exemptions

• A homeowner can use several exemptions to avoid paying additional income taxes after the foreclosure sale. The homeowner must file the federal Form 982 to claim an exemption. The most important exemption for a homeowner is the qualified principal residence exemption. The house can sell for as much as $2 million less than the amount remaining on the mortgage without producing a taxable gain, as long as it was the homeowner's main residence before the foreclosure.