Debt Forgiveness and Rental Depreciation

[dubya]

We are foreclosing on two properties in Michigan, each with two loans (2 primaries, 2 HELOC's). One was our primary residence from 2001 to 2004 then converted to a rental and depreciated as such. THe other was our primary residence from 2004 to last year, when we started the foreclosure process on both.

Forecasting our taxes for this year, we are taking into account the depreciation recapture, but I have a few questions:

1) what is the basis (?) now for the depreciation recapture? Is it what we owed on the primary? Is it what the property went for at the Sheriff's sale?

2) If I understand form 982 right, we can exclude the debt forgiveness from our income only on the primary residence, correct? What if the rental was unoccupied?

Please let me know if you need any other info...

-W

[llworking]

We are foreclosing on two properties in Michigan, each with two loans (2 primaries, 2 HELOC's). One was our primary residence from 2001 to 2004 then converted to a rental and depreciated as such. THe other was our primary residence from 2004 to last year, when we started the foreclosure process on both.

Forecasting our taxes for this year, we are taking into account the depreciation recapture, but I have a few questions:

1) what is the basis (?) now for the depreciation recapture? Is it what we owed on the primary? Is it what the property went for at the Sheriff's sale?

2) If I understand form 982 right, we can exclude the debt forgiveness from our income only on the primary residence, correct? What if the rental was unoccupied?

Please let me know if you need any other info...

-W

Your post is a little confusing. Are you being foreclosed upon, rather than you are foreclosing on? Are you the mortgagor, or the mortgagee?

Your basis in both properties is what you paid for them plus the cost of any improvements made to the homes after purchase. Basis has nothing to do with what the homes are sold for. It has to do with determining the gain or loss on the sale.

The first property is purely a business property at this point, the second still qualifies as a primary residence.

Most likely its going to be in your best interest to consult with a tax professional to forecast your potential tax liabilities.

[wally]

Your basis in both properties is what you paid for them plus the cost of any improvements made to the homes after purchase. Basis has nothing to do with what the homes are sold for. It has to do with determining the gain or loss on the sale.

You forgot about acquisition costs and any costs to defend ownership rights.

You can find a publication on the subject on the IRS' website (IRS.gov).