Tax implication on foreclosure of 2nd home.

[lostinmich]

Hello all, long time no visit. I have a question regarding foreclosure on a 2nd home. Here goes...

Purchased the 2nd home in Jan of 2005 for $325,000. Got a mortgage in the amount of $292,500. Foreclosed on in March of 2007. Bank says they are going to report to the IRS the amount of $295,000. Am I correct to assume that there will be no tax liability since the "sale" amount reported to the IRS is about equal to the existing mortgage balance AND is less than the original purchase price? If not, can someone help clear it up for me?

Thanks!

[HHM]

If there was no profit to you, then there should be no tax liability.