1099-A and depreciation recapture

Client had a rental that was foreclosed on in 2019. How do I handle any potential depreciation recapture? From what I'm reading, since this was not a true sale in terms of cash movement, section 1250 would not apply. Also, when you report on Schedule D - ignoring the recapture, the difference between purchase price and outstanding principal would result in a loss, obviously not an allowable loss, do you report on Schedule D and use code L to report the disallowed loss?

If this is a rental (no prior personal use by taxpayer), and it is a loss, no need to be concerned re: unrecaptured §1250 depreciation. Why is the loss not allowable?

COD income? Recourse or non-recourse debt?

Basis? FMV upon forclosure if recourse?

The 1099-A does indicate it was a foreclosure and the borrower was personally liable, therefore it is a recourse loan. This was their primary home when it was first purchased in 2006, and it's been a rental for 11 years.

As I understood it, in the case of a foreclosure (recourse), you'd choose the lower of FMV vs. outstanding loan balance as the "sales price". In this case, the outstanding loan balance is lower. FMV: $167,000, Loan balance: $138,467, adjusted basis: $131,900

In this case, the outstanding loan balance is lower. FMV: $167,000, Loan balance: $138,467, adjusted basis: $131,900

Doesn’t make a lot of sense. Why would a guy with equity in his property, even after a 6% commission, let it go into foreclosure? Maybe there’s a bunch of accrued interest you haven’t mentioned, I don’t know.

I agree with Jeff-Ohio, it doesn't make any sense. In arriving at the FMV to put on the 1099-A, lenders often use whatever appraisal that's in their file, which is usually the appraisal that was obtained when they first granted the mortgage loan, and is 'way out of date. Make a reality check on the FMV shown on the form.

Dave Fogel used to post here and taught many of us most of what we know on the subject.

See his articles here:

https://fogelcpa.com/tax-articles

You cannot trust anything on the 1099C form. Also since it was used previously as personal you might have another issue if the FMV was less than cost when it was converted.

Good luck.

In this case, the outstanding loan balance is lower. FMV: $167,000, Loan balance: $138,467, adjusted basis: $131,900

Doesn’t make a lot of sense. Why would a guy with equity in his property, even after a 6% commission, let it go into foreclosure? Maybe there’s a bunch of accrued interest you haven’t mentioned, I don’t know.

These folks are actually friends of mine, and when I asked her why it was foreclosed on, she said "it was not a good situation." I think, from what I understand, the tenant trashed it so badly it would cost a lot to fix up and they just decided to let it go back to the bank. At this point, I agree, whatever happened was probably not a wise financial move but here I am just trying to properly report it. The FMV and loan balance I took directly from the 1099-A, and of course, I had the adjusted basis already figured.

At this point, I agree, whatever happened was probably not a wise financial move but here I am just trying to properly report it.

You’re agreeing with a point we never made. We’re disputing the FMV. You imply an incorrect FMV yourself by saying, as per the client, the place was trashed.

I see, I did not realize the FMV the lenders used would be from when the loan originated, and in this case, 14 years ago would not make it accurate. Assume the correct FMV is below the adjusted basis, is the loss allowable? Also, if the FMV is slightly above the adjusted basis, what are those considerations? I'm comfortable with how this would work in an actual sale, but the foreclosure is what is throwing me and this would be the first 1099-A I've ever come across.

I have a similar situation, but it is a time share - not a rental property - surrendered to the bank since it was no longer being used and the taxpayer was in poor health.

The basis exceeds the remaining balance on the mortgage so where exactly is this reported. ROD is ordinary income, but property sale capital gain/loss.

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