Financially Distressed Taxpayers
•All audio is streamed through your computer speakers.
• There will be several attendance verification questions
during the LIVE webinar that must be answered via the
online quiz at the conclusion to qualify for CPE.
• For the archived/recorded version of this webinar, the
link to the attendance verification quiz is a final exam on
the topics covered during the presentation.
1
Financially Distressed Taxpayers
Canceled Debts, Foreclosures,
Repossessions, and Abandonments
2
Lesson Overview
 Who can be affected by foreclosures & repossessions?
 What is discharge of indebtedness?
 Foreclosure, Repossessions, and Abandonments
 Nonbusiness credit card debt cancellation
 Personal vehicle repossessions
 Principal residence foreclosure
 Home loan modifications
 Reporting taxable canceled debt
3
Lesson Overview
 Who is an applicable entity
 Student loan debt
 Insolvency exclusions
 Qualified farm indebtedness
 What are tax attributes?
 Qualified real property business indebtedness
4
Who Can Be Affected?
 Anyone who has debt and cannot pay in the current economic
environment
 Affected taxpayers include students
 Homeowner’s
 Investors
 Small and large business, and others
5
Who Can Be Affected?
 4.2 million homeowner’s foreclosed since 2007
 Foreclosures expected to rise to 6 million by 2014
 Banks are not lending and credit is hard to get!
6
Who Can Be Affected?
 Foreclosed homeowner’s can qualify for a home loan through
a government program (FHA)
 Federal Housing Agency (FHA) loans in 2011 were 30%
compared to 4.5% in 2005
 FHA loans require only 3.5% down payment
7
Discharge of Indebtedness
 If you owe a debt which is canceled or forgiven, you may incur
a tax liability
 Exceptions and exclusions may apply to canceled debt
 You may have to reduce tax attributes for any debt excluded
from gross income
8
Foreclosure or Repossession
 When foreclosed or repossessed property is sold, you are
treated as having sold the property
 You may have to recognize taxable gain
 Every taxpayer is affected differently – review the facts and
circumstances for each taxpayer
9
Foreclosure or Repossession
 Recognizing gain on “canceled debt” depends on whether you
are,
 Personally liable for the debt, and if
 The outstanding loan balance is more than the Fair Market Value
(FMV) of the property
10
Abandonment
 Property is abandoned when you voluntarily and permanently
give up possession, and
 You intend to end ownership without passing it on to anyone
else (You do not sell property)
11
Nonbusiness Credit Card Debt Cancellation
 You will receive a 1099-C if canceled debt is more than $600
 Canceled debt may become taxable income
 Taxpayer may qualify to exclude debt from income if
cancellation occurred in a Title 11 Bankruptcy
12
Personal Vehicle Repossession
 If your vehicle gets repossessed you should determine if you
have
 A gain, or
 Nondeductible loss on the disposition
13
Main Home Foreclosure or Abandonment
 Main home is considered “Principal Residence”
 Need to calculate gain or loss on foreclosure
 May qualify for exclusion under “Qualified Principal Residence
Indebtedness” rules
 $2 million exclusion for qualifying taxpayers MFJ; $1 million
MFS (to end on 12/31/13)
14
Main Home Loan Modification
 Lender agrees to a mortgage loan modification known as
“Workout”, which includes principal balance reduction of loan
 Taxpayer may qualify for Qualified Principal Residence
Indebtedness exclusion
15
Canceled Debts
 A debt includes any indebtedness:
 Which you are personally liable for, or
 Subject to which you hold property
 Personally liable debt is recourse debt
 All other debt is nonrecourse debt
16
Nonrecourse Debt
 You do not have ordinary income from cancellation of
nonrecourse debt, unless
 You retain the collateral and either
 The lender offers a discount for the early payment of the
debt, or
 The lender agrees to a loan modification that results in the
reduction of the principal balance of the debt
17
Nonrecourse Debt
 Must realize the entire amount of unpaid debt upon the
disposition of the property securing a nonrecourse debt
 May realize a gain or loss if outstanding debt before
disposition is more or less than the adjusted basis in the
property
18
Reporting Taxable Canceled Debt
 Report taxable canceled debt as ordinary income on:
 Form 1040 – Nonbusiness debt
 Schedule C – Debt is nonfarm sole proprietorship
 Schedule E – Debt is nonfarm rental of real property
 Form 4835 – Debt related to farm rental activity
 Schedule F – Debt that is farm debt and you are a farmer
19
Who Is An Applicable Entity?
 A federal government agency
 A financial institution
 A credit union
 Any organization in a significant trade or business of lending
money
20
Cancellation of Debt
 If an applicable entity cancels or forgives debt of $600 or
more, a 1099-C will be issued.
 Canceled debt is taxed as ordinary income even if you do not
receive a 1099-C unless
 An exception or exclusion applies
21
Discounts and Loan Modifications
 If lender offers to reduce the principal loan balance if loan is
paid off early, or
 Agrees to a loan modification “workout” which includes a
reduction in principal loan balance,
 The amount of discount or reduction is cancelled debt
whether or not you are personally liable
 If your debt is nonrecourse and you don’t retain the collateral,
you do not have cancellation of debt
22
Foreclosure and Repossession Debt
 Lender may forgive all or part of the debt in excess of the FMV
of property
 Cancellation of excess debt (Debt – FMV) may result in
Ordinary Income
 Gain or loss on disposition of property is calculated as (FMVAdjusted Basis)
 Character of gain or loss is determined by character of
property
23
Abandonments
 If abandoned property is secured by recourse debt, you will
realize ordinary income on cancelled debt
 You may realize a gain or loss on abandonment of property in
addition to debt cancellation
 Abandoned property secured by nonrecourse debt does not
create cancellation of debt income
24
Jointly and Severally Liable Debt
 If two individuals are jointly and severally liable for
cancelled debt, both may get a 1099-C showing entire
amount of canceled debt
 Not both individuals report the entire amount as income
25
Jointly and Severally Liable Debt
 Amount reportable as income depends on facts and
circumstances, including:
 State law
 The amount of debt proceeds each person received
 How much of any interest reduction from debt was claimed by
each person
 How much of basis of any co-owned property bought with debt
proceeds was allocated to each co-owner
 Whether canceled debt qualifies for any exceptions or
exclusions
26
Gifts
 Typically you do not have income from debt cancellation, if
 Cancellation or forgiveness of debt is a gift
27
Student Loans
 Certain student loans provide that debt will be canceled, if
 Student attends a Qualified educational institution, and
 Works for a certain time period in certain professions for any
of a broad class of employers
28
Student Loans
 If a student loan is canceled and meets the provisions,
canceled debt is not included in gross income
 To qualify for this treatment, loan must be made by one of
the following
29
Student Loans
 Federal government, state or local government
 A tax-exempt public benefit corporation which has assumed
control of a state, county, or municipal hospital, and whose
employees are considered public employees under state law,
or
 An educational institution (part of a program to encourage
students to serve in occupations or areas with unmet needs)
30
Student Loans
 Cancellation of student loans made by an educational
institution for performing services for that institution or
another organization,
 Must be included in gross income
 Loan must be part of a qualifying program
31
Education Loan Repayment Assistance
 Education loan repayments you receive from National Health
Services Corps Loan Repayment Program, or a State Education
Loan Repayment Program that is
 Eligible for funds under Public Heath Service Act,
 Are not taxable if you provide primary health services in
health professional shortage areas
32
Price Reduced After Purchase
 If seller reduces amount you owe when you are not insolvent,
and
 Reduction does not occur in a Title 11 bankruptcy case,
 The reduction does not result in cancellation of debt income,
 You must reduce basis in property by amount of debt reduced
by seller.
33
Home Affordable Modification Program
 Any pay-for-performance success payments that reduce the
principal balance of your home mortgage are not taxable
 Payments must be made under the Home Affordable
Modification Program
34
Exclusions for Canceled Debt
 Canceled debt may be excluded from taxable income
 If you exclude canceled debt under one of the provisions, you
must reduce your tax attributes which can include
 Certain credits, losses, and basis of assets
35
Bankruptcy
 Debt canceled in a Title 11 bankruptcy is not included in your
income
 Title 11 bankruptcy is a case under Title 11 of the U.S. Code
(including all Chapters in Title 11 such as Chapter 7, 11, and 13)
 Debtor must be under court jurisdiction and cancellation of
debt must be granted by court
36
Insolvency
 Canceled debt is not included in income to the extent you
were insolvent immediately before the cancellation
 All of your Liabilities must be more than the FMV of all your
Assets
 Assets include those that are collateral assets, and those
which are beyond reach of the creditors (retirement accounts)
37
Insolvency Exclusion
 Which liabilities are included in insolvency calculation?
 Entire amount of recourse debts (personally liable debts)
 Amount of nonrecourse debt that is not in excess of the FMV
of property that is security for the debt, and
 The amount of nonrecourse debt in excess of the FMV of the
property that is forgiven debt
38
How to Report Insolvency Exclusion?
 To exclude canceled debt under the insolvency exclusion,
attach Form 982 to tax return and
 Check Box on line 1B
 Must reduce tax attributes in Part II of Form 982
 Use Insolvency worksheet to calculate insolvency amount
39
Example 1
Insolvency More Than Cancelled Debt
 In 2011 Greg was released from personal credit card debt of
$5,000
 Greg received 1099-C reflecting $5,000 in Box 2
 Total liabilities $15,000 & FMV of assets $7,000
 Insolvent by $8,000 ($15,000 liabilities - $7,000 FMV)
 Insolvency is greater than debt - $5,000 debt excluded
40
Example 2
Insolvency Less Than Canceled Debt
 Same facts as Example 1 except for
 Greg’s liabilities before the cancellation were $10,000 & FMV
of assets were $7,000
 Greg is insolvent to extent of $3,000
($10,000 liabilities - $7,000 FMV of assets)
 Can exclude only $3,000 of the $5,000 debt
 Include $2,000 of canceled debt as income
41
Qualified Farm Indebtedness
 Exclude canceled farm debt if all three apply:
1)
Debt was incurred directly in connection with a trade or
business of farming
2)
50% of more of total gross receipts in 2009, 2010, and 2011
were from farming business
3)
The cancellation was made by a Qualified Person
42
Who Is A Qualified Person?
 An individual, organization, partnership, association, or
corporation actively & regularly engaged in the business of
lending money
 Also includes any federal, state, or local government agency.
U.S. Dept of Agriculture is a qualified person
 Qualified person can’t be related to you, can’t be the person
you acquired the property from or anyone related to this
person
43
Qualified Farm Indebtedness
 If Qualified Farm Debt is canceled in a Title 11
bankruptcy, you must apply the bankruptcy exclusion
 Do not apply the exclusion for Qualified Farm Debt
 If Insolvent before debt cancellation apply
Insolvency exclusion not Qualified Farm Debt
exclusion
44
Qualified Farm Debt Exclusion
 Amount of Qualified Farm Debt that can be excluded is
limited. It cannot be more than the sum of:
 Your adjusted tax attributes, and
 Total adjusted basis of “Qualified Property” held at the
beginning of 2013 (any property held or used in your trade or
business or for production of income)
 Any canceled qualified farm debt above this limit must be
included as income
45
Adjusted Tax Attributes

Adjusted tax attributes is the sum of the following 4 items:
1) Any net operating loss for 2012 and any NOL carryover to
2012
2) Any net capital loss for 2012 and any capital loss carryover to
2012
3) Any passive activity loss carryover from 2012
46
Adjusted Tax Attributes
4)
Three times the sum of any:
A.
B.
C.
D.
General business credit carryover to or from 2012
Minimum tax credit available as of the beginning of 2013
Foreign tax credit carryover to or from 2012
Passive activity credit carryover from 2012
47
How To Report Qualified Farm Indebtedness
Exclusion
 Check the box on line 1c of Form 982
 On line 2 of Form 982 include amount of qualified farm debt
canceled, but not more than exclusion limit
 Must also reduce the tax attributes in Part II of Form 982
48
Example 3
Chuck’s Farming Debt
 Chuck released from $10,000 of debt incurred directly in
connection with his farming business
 Received 1099-C showing $10,000 in Box 2
 For 2009, 2010, 2011 at least 50% of total gross receipts were
from farming trade or business
 Adjusted tax attributes are $5,000 & Adjusted basis in
qualified property is $3,000
49
Example 3 (Cont)
Chuck’s Farming Debt
 Does Chuck qualify to exclude canceled debt under the
Qualified Farm Indebtedness exclusion?
 If so, how much can he exclude?
 What do you recommend to Chuck as his tax professional?
50
Example 3 (Cont)
Chuck’s Farming Debt
 Chuck can exclude $8,000 of the $10,000 of canceled farm
debt
 $5,000 adjusted tax attributes + $3,000 total adjusted basis in
Qualified Property at the beginning of 2012
 Chuck must include $2,000 of canceled debt as income
51
Qualified Real Property Business Indebtedness

Can exclude canceled qualified real property business debt
from income if the following 4 conditions are met:
1)
Debt incurred or assumed in connection with real property
used in trade or business
2)
Debt is secured by the real property
52
Qualified Real Property Business Indebtedness
3)
Debt incurred or assumed

Before 1993, or

After 1992 if debt is either Qualified Acquisition
Indebtedness, or debt incurred to refinance qualified real
property business debt incurred or assumed before 1993
(cannot exceed original acquisition debt amount)
4)
You elect to apply these rules to the debt
53
What Is Qualified Acquisition Indebtedness?
 Debt incurred or assumed to acquire, construct, reconstruct,
or substantially improve real property that is used in a trade or
business and secures the debt, or
 Debt resulting from the refinancing of qualified acquisition
indebtedness, to extent amount of debt doesn’t exceed
amount of debt refinanced
54
Qualified Real Property Business Indebtedness
 If Qualified real property business debt is canceled in Title 11
bankruptcy case you must apply bankruptcy exclusion
 If insolvent immediately before cancellation of business debt,
you must apply insolvency exclusion before applying exclusion
for Qualified real property business debt
55
Electing The Qualified Real Property Business
Debt Exclusion
 An Election must be made to exclude canceled Qualified real
property business debt from income
 Election must be made on a timely filed tax return (including
extensions). May only be revoked with IRS consent
 Make Election using Form 982. Attach to tax return and check
Box on line 1d.
 Include canceled debt amount on line 2 of Form 982. Reduce
tax attributes in Part II of Form 982
56
Electing The Qualified Real Property Business
Debt Exclusion
 If you forgot to make election you are still eligible
 File an amended return within 6 months of the due date of
the return (excluding extensions)
 Enter “Filed Pursuant to Section 301.9100-2” on the amended
return
57
Qualified Principal Residence Indebtedness
 You can exclude canceled debt if it is Qualified Principal
Residence Indebtedness
 What is Qualified Principal Residence Indebtedness?
 Does everyone qualify for this exclusion?
58
Qualified Principal Residence Indebtedness
 Qualified Principal Residence Indebtedness is any mortgage
taken out to buy, build, or substantially improve your Main
home
 Also includes any debt secured by your main home that was
used to refinance a mortgage taken out to buy, build, or
substantially improve your main home
 Amount cannot exceed old mortgage principal balance just
before refinancing (NO Cash Out Loans)
59
Example 4
Becky’s Qualified Principal Residence Debt
 In 2005 Becky bought a Main home - $315,000
 Took out new mortgage loan for $300,000
 Took out 2nd mortgage loan for $50,000 at a later time to add
a garage to her home
 In 2012 her mortgage loan balance was $325,000 for 1st & 2nd
mortgage loans
60
Example 4
Becky’s Qualified Principal Residence Debt
 Becky refinanced the two mortgage loans of $325,000 into
one loan for $400,000
 FMV of her home at refinance was $430,000
 She used additional $75,000 from refinance loan to pay off
credit card debt and college tuition for her daughter
61
Example 4
Becky’s Qualified Principal Residence Debt
 How much is Becky’s Qualified Principal Residence
Indebtedness after the refinancing?
 What questions or documentation would you ask for when
your new client Becky comes to your office for her 2012 tax
return preparation?
62
What Kind of Property Qualifies for a Main
Home?
 A main home is the home where you ordinarily live most of
the time
 You can only have one main home at any one time
63
What Kind of Property Qualifies for a Main
Home?
 John Poor and Rhonda Poor have 2 homes within 5 miles of
each other.
 The second home was purchased as a foreclosure and it was
such a great deal the Poor’s couldn’t pass it up!
 Every 2 weeks the Poor’s get in an argument and Mr. Poor
lives in the 2nd home for 7 days
 Do both homes qualify as a main home?
64
Principal Residence Exclusion Limit
 Maximum amount of debt you can treat as Qualified Principal
Residence Indebtedness is $2 million or $1 million if married
filing separate
 Expired on 12/31/12 but extended to 12/31/13 under the
Fiscal Cliff Bill passed early January 2013
 Cannot exclude canceled debt if cancellation was for services
performed for the lender, or for any other factor not directly
related to a decline in value of your home or due to your
financial condition
65
Principal Residence Exclusion Ordering Rule
 If only part of a loan is Qualified Principal Residence
Indebtedness, the exclusion applies only to extent the amount
canceled is more than the amount of the loan that is NOT
Qualified Principal Residence Indebtedness
 The remaining part of the loan may qualify for another
exclusion
66
Example 5
Ken’s Principal Qualified Residence Debt
 Ken incurred recourse debt of $800,000 when he purchased
his main home for $880,000
 Ken refinanced for $850,000 when FMV of home was $1
million
 At time of refinancing the principal loan balance was $740,000
 Ken used $110,000 from refinance to pay off credit cards and
buy a New Porsche
67
Example 5
Ken’s Principal Qualified Residence Debt
 2 years after refinancing Ken lost his job
 He did a short sale of the property for $735,000
 FMV of home was between $700,000 - $750,000
 Lender canceled remaining $115,000 of debt
 How much of the $115,000 canceled debt can Ken exclude as
Qualified Principal Residence Indebtedness?
68
Example 5
Ken’s Principal Qualified Residence Debt
 Ken can only exclude $5,000 of the canceled debt
 Ken must include $110,000 of canceled debt as income
(unless another exclusion applies)
 $115,000 canceled debt - $110,000 debt that wasn’t Qualified
Principal Residence Indebtedness
69
How To Report Qualified Principal Residence
Indebtedness Exclusion
 Attach Form 982 to your tax return and check Box 1e
 On line 2 of Form 982 include the amount of canceled
Qualified Principal Residence Indebtedness, but not more than
exclusion limit
 If you continue to own the home you must reduce your basis
in the home
70
Reduction of Tax Attributes
Qualified Principal Residence Indebtedness
 Reduce the basis of your home by amount of canceled
Qualified Principal Residence Indebtedness excluded from
income, if you
 Continue to own the home after the cancellation of debt
 Enter amount of basis reduction on Form 982 line 10b
71
Bankruptcy and Insolvency
No Tax Attributes Other Than Basis of PersonalUse Property
 If you exclude canceled debt other than Qualified Principal
Residence Indebtedness and you have no tax attributes
besides the adjusted basis of personal-use property, then
 You must reduce the basis of the personal-use property you
held at the beginning of 2013 (in proration to adjusted basis)
 Personal-use property is any property not used in a trade or
business nor held for investment purposes
72
Bankruptcy and Insolvency All Other Tax
Attributes

If canceled debt is excluded using bankruptcy or insolvency
exclusions, you must reduce the following tax attributes by
amount of excluded debt:
1)
“Net Operating Loss” – Reduce any 2012 NOL first, then
any NOL carryover to 2011. (Reduce $1 for ever $1 of
excluded debt)
2)
“General Business Credit” – Reduce credit carryover to or
from 2012. (Reduce the carryover by 33 1/3 cents for ever
$1 of excluded debt)
73
Bankruptcy and Insolvency All Other Tax
Attributes
3)
“Minimum Tax Credit” – Reduce minimum tax credit
available at beginning of 2013. (Reduce credit by 33 1/3
cents for every $1 of excluded canceled debt)
4)
“Capital Loss” – Reduce first any 2012 net capital loss, then
capital loss carryover to 2012 (Reduce capital loss or
carryover by $1 for every $1 of excluded canceled debt)
74
Bankruptcy and Insolvency All Other Tax
Attributes
5)
“Basis” – Reduce basis of property held at beginning of 2013 (in
proportion to adjusted basis) in the following order:
A.
Real Property used in trade or business or held for investment
that secured canceled debt
B. Personal Property used in trade or business or held for
investment that secured canceled debt
C. Other Property used in trade or business or held for investment
75
Bankruptcy and Insolvency All Other Tax
Attributes
D.
Inventory, accounts receivable, notes receivable, or real
property held primarily for sale to customers
E. Personal-use property (not used in trade or business and not
held for investment)
6)
“Passive Activity Loss and Credit Carryovers” Reduce
passive activity loss and credit carryovers from 2012
(Reduce loss carryover by $1 for every $1 dollar of excluded
debt, Reduce Credit Carryover by 33 1/3 cents for every
dollar of excluded debt)
76
Bankruptcy and Insolvency All Other Tax
Attributes
7)
“Foreign Tax Credit” – Reduce credit carryover to or from
2012. (Reduce credit carryover by 33 1/3 cents for every $1
dollar of excluded debt)

An election can be made to reduce basis of depreciable
property before reducing other tax attributes

If amount of canceled debt excluded is more than total
basis of depreciable property, then reduce the other tax
attributes with the excess debt remaining
77
Bankruptcy and Insolvency Recapture of Basis
Reductions
 If basis of property is reduced under these provisions, and you
later sell or otherwise dispose of property at a gain
 The part of the gain due to this basis reduction is taxable as
ordinary income under depreciation recapture provisions
 Treat any Non Section 1245 or Section 1250 property as
Section 1245 property
78
Qualified Farm Indebtedness
 If debt is excluded under both insolvency exclusion and
Qualified Farm Indebtedness exclusion, you
 First reduce your tax attributes by the amount excluded under
the insolvency exclusion
 Next reduce your remaining tax attributes by amount of
canceled debt qualifying for farm debt exclusion
 Reduce tax attributes in same order explained under
“Bankruptcy and Insolvency” rules
79
Qualified Farm Indebtedness

Reduce only the basis of Qualified Property (property used
or held for use in a trade or business, or for production of
income) in following order:
1)
Depreciable qualified property
2)
Land that is qualified property and is used or held for use in
your farming business
3)
Other qualified property
80
Qualified Real Property Business Indebtedness
 If you elect to exclude canceled Qualified Real Property
Business debt, you must
 Reduce the basis of your depreciable real property by amount
of canceled Qualified Real Property Business debt excluded
from income
 Enter amount of basis reduction on Form 982 line 4
81
Foreclosures and Repossessions
 Foreclosures and Repossessions are treated as sales
 You may realize a gain or loss from transaction even if you
voluntarily return the property
 If outstanding loan balance is more than FMV of property, and
lender cancels all or part of loan balance, you
 May realize ordinary income from cancellation of debt
82
Foreclosures and Repossessions Gain or Loss
 Figure and report gain or loss in the same way as a regular
sale
 Gain = Amount Realized – Adjusted Basis
 Loss = Adjusted Basis – Amount Realized
83
Foreclosures and Repossessions
Amount Realized and Ordinary Income on
Recourse Debt

If personally liable for debt, the amount realized on the
foreclosure or repossession includes the Smaller of:
A.
Outstanding debt immediately before the transfer reduced
by any amount for which you remain personally liable
immediately after transfer, or
B. The FMV of the transferred property
84
Example 6
Lili’s Recourse Debt Foreclosure
 Lili paid $200,000 for her home
 Borrowed $185,000 from the bank
 Lili is personally liable for the loan (recourse)
 Upon foreclosure balance due was $180,000 & FMV of home
was $170,000
 Adjusted basis was $175,000 due to casualty loss
 Bank forgave $2,000 of the $10,000 debt that was in excess of
FMV ($180,000-$170,000)
85
Example 6
Lili’s Recourse Debt Foreclosure
 Lili remains personally liable for $8,000 balance
 How much ordinary income does Lili have from the
cancellation of debt?
 What is Lili’s Gain or Loss from foreclosure?
 Can Lili exclude any of the canceled debt?
86
Example 6
Lili’s Recourse Debt Foreclosure
 Lili has ordinary income of $2,000 from cancellation of debt
 ($170,000 FMV - $172,000 outstanding debt before
foreclosure less amount she remains personally liable for
$8,000) ($180,000-$8,000)
 Lili can exclude $2,000 of canceled debt under the Qualified
Principal Residence Indebtedness
 She has a $5,000 Nondeductible loss
($170,000 realized - $175,000 Adjusted Basis)
87
Amount Realized on a Nonrecourse Debt
The amount you realize a on nonrecourse debt includes
The full amount of the outstanding debt immediately before
the transfer
This holds even if the FMV of property is less than the
outstanding debt before the transfer
88
Abandonments
 Abandonment occurs when you voluntarily and permanently
give up possession and use of the property, but
 You don’t pass it on to anyone else (No Sale)
 A Voluntary conveyance of the property in lieu of foreclosure
(Deed in Lieu of Foreclosure) is not an abandonment.
 It is treated as an exchange of property to satisfy debt
89
Abandonments – Tax Consequences
 Tax consequences of an abandonment of property depends
on whether the loan is
 Recourse (Personally liable), or
 Nonrecourse (Not personally liable)
90
Abandonment of Property Securing Recourse
Debt
 If you abandon property that secures debt for which you are
personally liable, you do not have gain or loss until the
foreclosure is completed
91
Abandonment of Property Securing
Nonrecourse Debt
 If you abandon property that secures debt for which you are
not personally liable (nonrecourse) debt, the abandonment is
treated as a sale or exchange
 Amount realized on the abandonment of property is the
amount of the nonrecourse debt
92
Abandonment of Property Securing
Nonrecourse Debt
 If amount realized is more than the adjusted basis, you have a
gain
 If adjusted basis is more than amount realized, you have a loss
 Loss from abandonment of business or investment property is
a deductible loss
 Character of the loss depends on character of the property;
Cannot deduct loss for personal use property
93
Abandonment – Canceled Debt
 If abandoned property is secured by debt that you are
personally liable for, and debt is canceled
 You will realize ordinary income equal to the canceled debt,
and
 You will realize gain or loss from abandonment
94