10099-A after bank repossession

[Hugo]

Please help

taxpayer had an investment property (apartments) last year stop making paymets, he lost the property bank took over and a the end of year taxpayer got a 1099-A. (short version)

how do we treat this 1099-A on taxpayer income tax return?

your Inputs are appreciated.

Thanks

[Lion EA]

This is a "sale" of his property. Search on this site to find lots of informative threads on this topic.

[Jack from Ohio]

Please help

taxpayer had an investment property (apartments) last year stop making paymets, he lost the property bank took over and a the end of year taxpayer got a 1099-A. (short version)

how do we treat this 1099-A on taxpayer income tax return?

your Inputs are appreciated.

Thanks

Treat it as a sale of the property. Use the amount of the outstanding loan as the purchase price. Recapture depreciation as normal. He may have capital gains, especially if he took cash out when he financed or refinanced the property.

Remember, this is NOT a cancellation of debt. This is an exchange of property.

If/when he receives a 1099-C, then you will have debt cancellation to contend with.

[Pacun]

I would use the FMV value as the selling price.

[Jack from Ohio]

I would use the FMV value as the selling price.

Selling price is the amount that the bank "forgave" for the property. Using FMV is not correct.

[Pacun]

The bank didn't forgive anything yet.

Let's say that I have enough money and I bought a house for 800K. I owe $750K and the area has became so ugly that houses prices have dropped a lot. The FMV of my house is $350K. I have money and I decided to walk away from this rental house. The 1099-A will show $750K and FMV $300K. If I claim that I sold the house for $750K, I will have a loss for $50K (forget depreciation to simplify). The bank later on sells the house for $300K and sends me a 1099-C for $450 on which I will have to pay taxes. Doesn't look right, correct?

[Jack from Ohio]

The 1099-A is NOT forgiveness of debt. That is a 1099C. Two entirely separate transactions.

The 1099-A indicates that the property was taken back by the bank for the amount OWED on the note. It is a transfer of property.

The transaction must be treated like a sale. If there is gain, then it is capital gains. If there is a loss, there is no capital gains.

FMV on the 1099-A serves only for information.

If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. The foreclosure or repossession is treated as a sale from which you may realize gain or loss. This is true even if you voluntarily return the property to the lender. If the outstanding loan balance was more than the FMV of the property and the lender cancels all or part of the remaining loan balance, you also may realize ordinary income from the cancellation of debt. You must report this income on your return unless certain exceptions or exclusions apply. See chapter 1 for more details.

Borrower's gain or loss. You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale. The gain is the difference between the amount realized and your adjusted basis in the transferred property (amount realized minus adjusted basis). The loss is the difference between your adjusted basis in the transferred property and the amount realized (adjusted basis minus amount realized). For more information on figuring gain or loss from the sale of property, see Gain or Loss From Sales and Exchanges in Publication 544.

http://www.irs.gov/publications/p4681/ch02.html