What is income tax treatment if the County closes on a rental property for back taxes and then the property is reacquired by the same owner in the tax auction? Is it like a stock wash sale? Assume amount paid in auction is not expensed as property tax but added to basis.
You have two separate ownership transactions. When the county foreclosed and took the property, the property is considered to have had a "sale". You must calculate your gain or loss based on the "sale" amount and the cost basis.
The sale amount is equal to the amount of debt forgiven, or in this case, the amount of back taxes it paid off.
When you purchased at auction, you started as though this were any other newly acquired property.