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FiveStarLaw
FiveStarLaw, Attorney
Category: Bankruptcy Law
Satisfied Customers: 36456
Experience:  Bankruptcy Lawyer. Experienced.
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I surrendered 3 residential rental properties in a Ch 7 BK

Customer Question

I surrendered 3 residential rental properties in a Ch 7 BK that was filed 9-09 and has been discharged and abandoned by the trustee. I exempted the INCOME from those rentals and have continued to collect rents and am paying some money toward the mortgages. In 2010, I expect one of three events to occur. 1. the bank will foreclose on the properties. 2. I will short sale the properies, or 3. I will do a 'work out' with the bank on the properties.

my questions are 1. how do I treat this on my 2009 tax return? Do just do a sch E as I always have since I have collected rents and paid on the mortgages? and for 2010, what tax implications should I be aware of with respect to the 3 events that could occur in 2010?

I have been told by 3 attorneys that there is no tax on forgiveness of debt on the foreclosure, short sale or workout. So, my question #2 is in relation to capital gains tax and recapture of depreciation in the event of foreclosure, short sale or workout in 2010.
Submitted: 4 years ago.
Category: Bankruptcy Law
Customer: replied 4 years ago.
Relist: No answer yet.
Expert:  FiveStarLaw replied 4 years ago.
Hello,


Thank you for your question.

Rental income cannot be exempted in a chapter 7 bankruptcy. Therefore, I'm interpreting your question to mean the following:
1. The trustee abandoned his interest in your rental properties
2. You did not reaffirm the mortgages on the rental properties
3. You have been collecting the rent on the rental properties

On your statement of intentions in your bankruptcy petition, did you indicate that you would surrender the rental properties?
Customer: replied 4 years ago.
I did surrender the rental properties. I did exempt the rental income. it was actually suggested to do so by the trustee. Yes, the trustee abandoned the properties. I did not reafirm the mortgages. yes, I have been collecting rents. I stated all this in my original question. There are no factual errors in my original question.
Customer: replied 4 years ago.
are you a tax expert? you were very helpful answering some legal questions, but I posted this for a tax expert. If you are a tax expert and can answer the tax questions that would be great. thank you.
Expert:  FiveStarLaw replied 4 years ago.
yes I am a tax expert however this is more of a legal bankruptcy question in my opinion.I reviewed your prior questions and answers. It appears from your prior question-and-answer sessions with myself and other experts that you surrendered the properties on your statement of intentions. Is that correct?
Customer: replied 4 years ago.
yes
Expert:  FiveStarLaw replied 4 years ago.
Hello,

Within 45 days of the filing of the statement of intentions, a debtor must perform the intention with respect to the property. 11 U.S.C. § 521(2)(B). Obviously the 45 days have passed. By this time you should have served the statement of intentions on the secured creditors.
Customer: replied 4 years ago.

it appears that you are making some legal point with regard to my question. what is the significance of that. To me, it is mute, but to you it appears to be very important.

Expert:  FiveStarLaw replied 4 years ago.
In 2010, I expect one of three events to occur. 1. the bank will foreclose on the properties. 2. I will short sale the properies, or 3. I will do a 'work out' with the bank on the properties.

my questions are 1. how do I treat this on my 2009 tax return? Do just do a sch E as I always have since I have collected rents and paid on the mortgages?
Correct
and for 2010, what tax implications should I be aware of with respect to the 3 events that could occur in 2010? I have been told by 3 attorneys that there is no tax on forgiveness of debt on the foreclosure, short sale or workout. So, my question #2 is in relation to capital gains tax and recapture of depreciation in the event of foreclosure, short sale or workout in 2010.
There will be no capital gains tax, recapture of depreciation or tax on the forgiveness of debt due to the chapter 7 bankruptcy

 

Customer: replied 4 years ago.

did you mean that I would not have to pay capital gains tax for the specific amount of the forgiven debt, or for any amount based upon the difference between the adjusted sales price and the adjusted basis?

 

 

Expert:  FiveStarLaw replied 4 years ago.
This does get very confusing and is made more difficult communicating due to the forum. I meant both.

When an individual debtor files bankruptcy under Chapter 7, a new taxable entity is created that is separate and distinct from the debtor. All property owned by the debtor at the time the bankruptcy case is initiated passes by operation of the Bankruptcy Code to the bankruptcy estate and the transfer is not treated as a taxable disposition. Thus, the transfer does not require income tax to be paid on the gain in the assets involved. Nor does the transfer trigger income tax liability from the recapture of depreciation.

At this time I would appreciate if you would accept/bonus my answer.
Customer: replied 4 years ago.

I put a pretty high price on the question because I know it is complex. i can pay a bit more,but in my initial question I had asked about the tax implications of three scenarios. When you decided to take on the question as asked with the amount placed on the question, my hope was that I would get a comprehensive answer to the three scenarios.

 

when the trustee abandons the property and closes his file, then do not i still own the property, especially if I do a work out with the bank and keep paying on the debt?

 

in one of my three scenarios, i work out a deal with the mortgage company. in that scenario I end up continuing to own the properties. then at some point in the future, i sell the properties. in this scenario, i assume that I would indeed have to pay capital gains tax as well as recapture of depreciation.

 

my tax liability for the different scenarios will make a big difference as i decide whether to let them foreclose, do a short sale or do a loan modification/principal reduction with the bank and then continue to own the properties.

Customer: replied 4 years ago.

Unless you tell me differently, then from your answer it does not matter how long I continue to collect rents, manage the property and whether or not i work out a loan mod with the bank. i will owe no taxes on the disposition of the property if/when i sell it for a gain in the future. this does not make sense to me,but i sure like the concept.

 

normally, i am sure that most people would just let the property go into foreclosure, but iif I can work a deal with the bank, then i think i should. just wanted to know the tax implications of doing that.

 

Customer: replied 4 years ago.

When an individual debtor files bankruptcy under Chapter 7, a new taxable entity is created that is separate and distinct from the debtor. All property owned by the debtor at the time the bankruptcy case is initiated passes by operation of the Bankruptcy Code to the bankruptcy estate and the transfer is not treated as a taxable disposition. Thus, the transfer does not require income tax to be paid on the gain in the assets involved. Nor does the transfer trigger income tax liability from the recapture of depreciation.

 

I understand this answer. Please confirm whether it makes a difference if i keep paying on the property, do a work out with the bank and then sell it years later. I would assume that it does matter. My tax obligation will affect what deal I would be willing to work out with the bank,and I want to pay the taxes due and not do something that will get me in trouble with the IRS. Once you get back to me, then I pay and accept with good feedback. Thank you very much.

Customer: replied 4 years ago.
Relist: Incomplete answer.

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