Help with foreclosure on rental

[JoshinNC]

OK, I just want you guys to check my thinking to make sure I'm on the right track.

All numbers presented are fictional and rounded for easy math:

TP built rental property at cost of $120,000 and took out loan for entire cost in 2004. In 2009 TP finally gives up on property and voluntary turns it over to bank when debt is at $100,000 and FMV is $110,000. Depreciation taken is $15,000, making adjusted basis $105,000. Bank issues 1099-C (recourse loan).

Here's what I calculate -

TP reports "rent income" on Sch. E in the amount of $100,000 (amount of debt cancelled, since it is less than FMV). TP also takes ordinary loss on 4797 of $105,000 (adjusted basis) because it is an abandonment of business or investment property (TTB pg. 9-21).

Please check my thinking and let me know if I'm on the right track.

Thanks in advance!

[solomon]

OK, I just want you guys to check my thinking to make sure I'm on the right track.

All numbers presented are fictional and rounded for easy math:

TP built rental property at cost of $120,000 and took out loan for entire cost in 2004. In 2009 TP finally gives up on property and voluntary turns it over to bank when debt is at $100,000 and FMV is $110,000. Depreciation taken is $15,000, making adjusted basis $105,000. Bank issues 1099-C (recourse loan).

Here's what I calculate -

TP reports "rent income" on Sch. E in the amount of $100,000 (amount of debt cancelled, since it is less than FMV). TP also takes ordinary loss on 4797 of $105,000 (adjusted basis) because it is an abandonment of business or investment property (TTB pg. 9-21).

Please check my thinking and let me know if I'm on the right track.

Thanks in advance!

There is no COD income because the FMV is more than debt cancellation. Did client receive any proceeds - 10K based upon the above numbers?

There would be either a 5K gain or 5K loss depending if 10K were received or not.

[JoshinNC]

Right, no COD

but there should be a gain/loss on the disposition because the TP was recourse on the loan up to the outstanding debt, correct (TTB pg. 14-10). I guess my question is, is the gain/loss based upon taking the adjusted basis and subtracting the cancelled debt or is it the full adjusted basis because the sale price is zero?

[solomon]

but there should be a gain/loss on the disposition because the TP was recourse on the loan up to the outstanding debt, correct (TTB pg. 14-10). I guess my question is, is the gain/loss based upon taking the adjusted basis and subtracting the cancelled debt or is it the full adjusted basis because the sale price is zero?

If client receives no sale proceeds, then the sales price is 100K and adjusted basis is 105K producing a 5K loss.

[JoshinNC]

That's where I was getting confused at

Thanks for your clarification! Never had a rental that was foreclosed on for a client.

[solomon]

Thanks for your clarification! Never had a rental that was foreclosed on for a client.

For easy reading, the IRS has Publication 4681.