Forclosure

[ILLMAS]

TP sold an investment property in 2006, he deffered the gain by doing a 1031 exchange and using about 100K as a down payment for another investment property. In 2010, he filed for bankruptcy and he forclosed on the property. Now since he deferred the gain on the sale back then, is the TP on the hook now for taxes on the 100K? Anyone?

[jainen]

>>deferred the gain <<

The fact that he acquired the property by exchange is irrelevant now. The deferred gain is already accounted for in his adjusted basis, which should be much lower than the actual purchase price of the replacement property because it uses the carryover basis. You just need to make sure you pick up the various pieces of adjusted basis--the carryover basis, any additional purchase value even if paid by mortgage, and the ordinary transaction costs and capital improvements and depreciation and so on. If the exchange included appliances or other personal property, that's another piece of the adjustment.

Once you have the basis, you can determine gain/loss on the foreclosure in the ordinary way, paying attention to recourse or non- as well as the other usual stuff.

[ILLMAS]

>>deferred the gain <<

The fact that he acquired the property by exchange is irrelevant now. The deferred gain is already accounted for in his adjusted basis, which should be much lower than the actual purchase price of the replacement property because it uses the carryover basis. You just need to make sure you pick up the various pieces of adjusted basis--the carryover basis, any additional purchase value even if paid by mortgage, and the ordinary transaction costs and capital improvements and depreciation and so. If the exchange included appliances or other personal property, that's another piece of the adjustment.

Once you have the basis, you can determine gain/loss on the foreclosure in the ordinary way, paying attention to recourse or non- as well as the other usual stuff.

Thank you, I do have all that info of when I prepared the new basis, I just did not know where to start.