Foreclosure

[GTS1101]

Hi,

I have a client who abandoned his property in Oct 06 because he could no longer make the payment. He recv'd a Form 1099A showing a Fair Market Value higher than the Balance of Principal outstanding. From reading the Pub 544 it seems as if a foreclosure is treated as if he sold the property? Does that mean a capital gain between the balance of principal outstanding and the adjusted basis? Is there any way to avoid capital gain on a foreclosure?

Thanks!

GTS1101

[jerome]

For purposes of computing gain or loss, a foreclosure or repossession is treated as a sale or exchange. The amount realized on the foreclosure depends upon whether the debt was nonrecourse or recourse debt. The tax book on page 14-10 explains the difference, and provides several examples to illustrate how to compute the gain or loss.

[WhiteOleander]

If the property was his residence, he can exclude any gain with the Sec. 121. See if he meets those requirements.

If not his residence, he may have more to add to the basis than is reported on the 1099A. The loan company will not necessarily know all the purchaser invested on their own in a piece of proprty.

HTH

[Acownt4it]

Insovency Exception-Form 982

If debtor is outside bankruptcy-

If the indebtedness is discharged what the debtor is insolvent (but not in bankruptcy case), the discharge is excluded from the debtor's gross income up to the amount of the insolvency. (Code Sec. 108(a)(1)(B), code Sec. 108(a)(2)(A), Code Sec. 108(a)(3)).

A debtor is insolvent for this purpose if, immediately before the debt is discharged, his liabilities exceed the FMV of his assets. (Code Sec. 108(d)(3)).

This is a summary, you should read these Codes cited above.

[jimmcg]

I have in the past provided documentation of debtor insolvency by preparing a Statement of Financial Condition immediately before the debt cancellation and also immediately after the debt cancellation. I have the client sign both statements in affidavit format. I then prepare a statement showing net worth before and after and the resultant change in net worth as a result of the debt cancellation. This will document the insovency requirement. A word of caution, gathering the information to list all assets and laibilities can take some time so charge accordingly and of course get a solid retainer up front.

[jainen]

This won't help

>>document the insovency<<

This won't help the problem in the original post. This taxpayer was not insolvent -- the debt was less than the value of the property and was paid in full with the foreclosure. He abandoned the property because of cash flow.

Treat it as a sale. If he let it go at significantly less than FMV, say 20% or so, I would do additional research to make sure it was an arms length transaction and had a reasonable economic purpose other than reducing capital gains tax.

[jimmcg]

I would not reach a conclusion as to the taxpayer's solvency or insolvency until I had all the facts determined from listing all the taxpayer's assets and liabilities.

[WhiteOleander]

At this point there is no forgiveness of debt. The property was repo'd. And from the original post, there doesn't seem to be an "unsatisfied" debt.

But, even if there is a debt still outstanding, the debtor has not forgiven it yet. If it is forgiven, a 1099C would be issued. It is at that point that you try to determine if the taxpayer was insolvent when the debt was forgiven.