cpatrader

My client told me he tried to rent it out but to no avail. Also, I believe I can use Form 4797 anyway because per publication 4681 under Abandonments, it states that the loss from the abandonment of business or investment property is deductible as an ordinary loss, even if the property is a capital asset. Besides that fact that he did try to rent out the propety, wouldn't this rule also apply if someone simply purchased a property dirt cheap, held it for a couple of years but never rented it out, and then tried to resell it at a profit (much like stock speculating)? I would view a transaction like this as an investment (but not business property) and therefore deduct it on Form 4797.

I'm trying to prepare a client's 1040 and he was issued a Form 1099-A for an investment property that was foreclosed and later sold by the bank. The date of acquisition is 8/24/09, Box 2 shows a balance of principal outstanding of $240,767, Box 4 shows the FMV of the property as $78,040 and Box 5 is marked that the borrower is personally liable for the repayment of the debt (IOW, it's with recourse). My client won't be able to use the insolvency provision because he isn't. He also doesn't have any plans right now to file for bankruptcy. Is anyone familiar with the tax consequences and reporting requirements with this type of transaction? I've done quite a bit of research and from what I can see, my client may or may not have Cancellation of Debt Income (COD) and must also treat this foreclosure as a sale of the property. Normally, the COD income, which would go on Line 21 (this was an investment property as he tried to rent it out but never could, but not a principal residence) would be Box 2 Less Box 4 which would equal $162,727. Then, I'd compute a loss on the property of the FMV less his adjusted basis which would equal ($78,040 - $240,000 his adj basis) = (161,960). It's my understanding that a sale of investment property that's foreclosed is supposed to be recorded on Form 4797, Part II which would give him an ordinary loss instead of a capital loss which would be quite favorable for him. If this is all correct, so far so good. Here is my dilemma: The lender never issued a 2009 Form 1099-C showing that the debt was ever cancelled and in fact won a judgment in court (in Illinois) in the amount of $200,331 (probably includes accrued interest, court costs, attorney's fee, etc.) which is known as a deficiency. If my client wasn't let off the hook during 2009, then he is in a situation that he has no COD income to report in 2009 but he'll still have an ordinary loss from the foreclosure. He then may get hit with a Form 1099-C during 2010,2011, etc. and if so, he'll have no loss to write off against that future income because he must take that $161,900 loss on his 2009 Form 1040. The reason he wouldn't have COD income during 2009 is that the formula for COD income is actually the (Box 2 amount reduced by any principal he is still liable for after the exchange of property) minus the Box 4 amount. So, in this case, it would be ($240,767 -$162,767 principal still owed after the lender sold the property) minus $78,404 or ($78,040 - $78,040) = 0. Also, does anyone know if an ordinary loss from Form 4797, Part II, has any implications on Form 6251 for AMT? I didn't see any but I'm just checking. What do you make of all of this? I doubt my client will be paying back anything to the lender so I know he'll have some COD income at some point because the bank won't be able to collect any money from him. Ideally, I'd like to take the COD income and ordinary loss in 2009 and be done with it all. If I take the loss in 2009 and then have to pick up the income in a later year, he'll get slammed in that later year when he has to pick up that income.