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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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I lost my house to foreclosure in 2002, can I claim it as a loss

Customer Question

In February 7, 2002, the 4-family house I owned was sold at auction for $300,000. I did not get a dime from the sale. Unfortunately I dealt witha disreputable mortgage company and when I could no longer make the mortgate payments, the house was foreclosed on. I was trying to find a way to keep my home, but while in the process of doing this, someone came to my home and told my tenants that I was renting apartments to them illegally and that they did not have to pay me rent, which they stopped doing, so no I had no income whatsoever! I tried declaring bankruptcy, but that did not work.
Submitted: 11 years ago.
Category: Tax
Expert:  Christopher Phelps replied 11 years ago.

Potentially, yes you may have a deductible loss. I am assuming you lived in one-fourth of the residence and that you rented the other three. 


When the residence was sold you treat the transaction in two parts.  One part (1/4th) is personal representing the sale of your principal residence.  Any loss on this portion is considered personal and is non-deductible.  Gains are excludable up to $250,000 if filing single ($500k if MFJ). 


The second part of the sale relates to the rental portion (3/4ths).  Any loss realized on this portion would be deductible as a capital loss.  Such losses are deductible to the extent of capital gains plus $3,000.  Any loss not used as a result of this limitation is carried forward indefinately.


Gain or loss would be calculated by subtracting your cost basis (i.e. original purchase price plus improvements less depreciation; 1/4th allocated to the principal residence and 3/4ths allocated to the rental property) from the net sales price received through foreclosure.  The only issue you may have is whether there was cancelation of indebtedness income as a result of the foreclosure.  If there was you would either have been required to recognize it on your return as ordinary income (i.e. you were NOT bankrupt or insolvent) or you would have had to reduce your cost basis in your assets (i.e. you WERE bankrupt or insolvent).  If you reduced cost basis in the rental property then your gain/loss calculation would be affected accordingly. 


Gain or loss should be reported in the year of sale.  You may need to amend a return to properly report it.      

     

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