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BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
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Experience:  Owner of a CPA firm
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Foreclosure Tax Question for 2009 Tax Return

Resolved Question:

I lost my 4-plex to foreclosure due to personal circumstances. I originally purchased the 4-plex on 9/1998 for $235K, the 4-plex fair market value (FMV) on 10/2009 was around $275K and the outstanding loan was at $183K when the bank foreclosed. With so much equity the bank was unwilling to work with. Is there a way to recoup the $95K loss, between the outstanding loan amount and the FMV, and carry it as a loss on my tax return?
Submitted: 5 years ago.
Category: Tax
Expert:  BK-CPA replied 5 years ago.

BK-CPA :

Hello and thank you for your question.

BK-CPA :

Your foreclosure is generally treated as a sale for income tax purposes for which gain or loss can be recognized (IRC 1001).

BK-CPA :

The four-plex was a rental property, correct?

Customer:

Yes

BK-CPA :

Do you know whether or not your loan was a recourse loan? Recourse loans are ones where you are personally liable for the debt, meaning not only can the bank foreclose, but they can come after you for the difference.

Customer:

Turbo Tax is only letting me show a "gain" between the loan amount and my adjusted tax basis. But it is not letting me show the loss between the FMV

Customer:

Yes, the loan was a recourse loan

BK-CPA :

The amount realized will be the loan amount with a recourse loan in this case because the fair value of the property exceeds the loan amount. You should generally be entitled to the difference between what you owe and what your house is sold for, noting the bank will be eating up equity in the foreclosure process with fees, etc.

BK-CPA :

Your gain (loss) is equal to the amount realized (loan amount) less your adjusted basis in the property.

BK-CPA :

Your basis in the property will be your initial cost basis (what you paid originally) less the years' depreciation adjustments (IRC 1012, 1016).

Customer:

So the loss between the FMV and the loan amount is not considered because it was a recourse loan?

BK-CPA :

Your gain then will be subject to IRC 1250 recapture and may be taxed at 25% generally (IRC 1).

BK-CPA :

The loss between the fair market value and the loan amount isn't a loss to you. That is why it isn't considered.

Customer:

Ok, Thank you

BK-CPA and other Tax Specialists are ready to help you
Expert:  BK-CPA replied 5 years ago.
Thank you!!