
Quoting
Taxing Matters
Transferring it to a LLC will not help you at all with the tax loss. Whether you let it go it go to foreclosure with the property deeded to you or to the LLC the amount of any loss will be the same.
Your basis in the property is whatever you paid for it. The difference between that and the fair market value or the proceeds generated by the county at the sale will determine what gain or loss you have on the disposition of the property. Bear in mind that a capital loss can only offset capital gain and, for individuals, if there is not enough capital gain to absorb the loss, you may offset up to $3,000 of the loss against ordinary income. Any excess over that must be carried forward to the next tax year.
You might be better off trying to sell the property yourself and get whatever you can for it. If it is not enough to pay off the mortgage on it, see about arranging a short sale with the lender. Limiting your financial loss is almost always better than taking the tax loss as the tax loss will not fully compensate the financial loss you suffer.
Note that if any portion of the mortgage debt is cancelled/discharged out of the foreclosure/short sale that discharged debt is itself taxable income unless you qualify for one of the exceptions to including it income, which for a vacant lot will come down to either the insolvency exception or, if you file bankruptcy, the bankruptcy exception.