Rental Foreclosure - Non recourse & Recourse loan

[GTS1101]

I have a client who has a 1st and 2nd loan on their rental home. She may foreclose before 2008 is over. Her 1st loan currently has a balance of 300,000 and is a non-recourse loan. The 2nd loan has a 150,000 balance and is a recourse loan. For the recourse loan she is insolvent and their is no cancellation of debt per IRS instructions. But for the non-recourse loan the loan balance immediately before foreclosure is the selling price. I wasn't sure how to calculate the gain or loss. I used the 300,000 as the selling price and to get the cost basis I used the original cost of the rental minus depreciation plus improvements and multipled by the percentage of the loan that is non-recourse. To get that percentage I took the original non-recourse loan and divided by the total of the two loans to get the non-recourse percentage. The difference was about 41,000 which is taxable gain. The amount of depreciation taken over the years was 40,574. Would all of the gain be ordinary tax rate or some or all capital gain for the depreciation recapture?

Thanks!
GTS1101

[Davc]

Don't forget Form 982.

[BOB W]

Don't forget Form 982.

I just looked at form 982 as it relates to 1099a, in particular to Credit Card discharge. It appears that only line 2 and line 10a need to be completed.

[JON]

If

both loans were used on this rental would not the sales proceeds be the balance in both mortgages/loans. Recourse gives the legal right to pursue other than property, but the gain loss on rental would have all loans unless proceeds were clearly used for other purposes???