Will I have to pay capital gain taxes?

[OutOfMyMind]

You may see a few posts from me in the next weeks ahead. My husband and I are filing for Chapter 7 in mid January.

We have a commerical building that was foreclosed on and will go up for auction today. If it brings more than we originally paid for it, would we be responsible for capital gains taxes? There was some equity in it that we pulled out when we refinanced it (about 300K). We used it for our business which failed and causing us all our financial problems.

[HHM]

I don't think so, I don't think foreclosue is considered a sale or transfer for IRS purposes that gives rise to capital gains tax. But I am winging it, short of searching the IRS website www.irs.gov, I don't know for certain.

[sisterfunkhaus]

I was curious about that same thing. That's something I forgot to ask my attny.

[HHM]

Part of capital gains is that you get real money out of the deal (which is highly unlikely in a foreclosure circumstance). I suppose that if the house was sold at auction for more than it is worth, you would pocket the difference and that money would be considered a capital gain. (However, sale of your primary residence is generally exempt from Capital Gains taxes).

Since houses rarely sell at auction for more than what is owed, it is usually moot point.

[OutOfMyMind]

Thanks HHM! We heard the bank bought the building back. I wonder if it makes a difference being commerical property? Well, I guess no one bid our payoff.

[Grace]

I STRONGLY recommend consulting an accountant about this when filing your taxes. The tax code is anything but clear. The last thing you need is a tax lien. I cruised the IRS web site on capital gains, and I couldn't figure it out in the short while I read.

[OutOfMyMind]

Thanks, I just looked at the IRS website. It is unclear. We will definitely find out when filing.

[SleepWellNow]

Please talk to a CPA. My CPA told me, in determining the capital gains on my foreclosed (and short sale) properties, the market value is determined by the amoount owed at the time of the BK. I just couldn't believe she was correct so I called the IRS and they confirmed a foreclosure is considered a "sale" for tax purposes and it is based on what we owed. Doesn't seem reasonable to me but that's what they said. Thus, my problem. I too refinanced my rental properties and used the money to make property improvements and purchase another property. Now, to determine my adjusted cost basis, all the depreciation is being added back in (one property was purchased in 1999) and the "sale" price is what was owed at the filing of the BK, not what the property is worth right now. To make matters worse, the amount of the tax form 982 (filed because of all the 1099c's sent by the discharged creditors) wiped out my loss carryovers. Therefore, I am facing a HUGE capital gains tax due, possibly over $100K. When we filed BK, I never saw this coming, not that it would of kept us from filing. Because of the loss of our business, we had no choice. This is just one more issue we will have to deal with to finally be debt-free.

[tyson24]

Ooops...this thread is 4 years old

[SleepWellNow]

Tyson24 - I was emailed your post before you deleted it so I read about your situation. I didn't realize the thread was 4 years olds either. I found it while searching for Capital Gains issues.

It sounds to me like the property you are worried about is your personal residence. They are handled differently than investment properties. We are also upside-down on our personal residence and will be doing a short sale. We owe a considerable amount more than we paid for it. I'm not worried about capital gains on that property because of the capital gains exclusion on a personal residence. If you are worried, talk to your attorney again. You may find you have nothing to worry about. Also, it doens't hurt to talk to a CPA. Most of my anxiety during this process has come about by not knowing. Once I know what we need to deal with, we deal with it. Good luck to you!

[tyson24]

This property is relative homesteaded, meaning we have family living in it and are taxed at a lower rate than just having 2 renters in there. So I am not sure how this qualifies. But we have a primary residence as well that we live in.

I have been so happy about this bk and getting rid of all this debt, that I forgot to worry about this aspect. I remember my attorney saying something about not having to worry about this, but I cannot remember.

What if we never get a 1099 on this? Does it just go away? I was reading something about having to redo the cost basis, and it sounded like it involved the depreciation that we have been claiming since, wait for it...1996! Ugh...if that is the case, I don't know what we will do.

[SleepWellNow]

I'm just now gathering all my financials for the CPA. I too am very confused and have no idea how much we will end up owing. I've searched on the internet and IRS sites but it is too over-whelming for me. One of my properties was purchased in 1999 and the other in 2002 so we also are dealing with a lot of depreciation. As much as I'm dreading hearing the amount we are going to owe, I will feel some relief finally knowing what we are dealing with. It is the last phase of our financial clean-up. Our business is gone, but so it all the debt due to the business failure. We've lost (with 2 more to go this year) all of our investment properties (and thus, our retirement plan) but we also don't have the monthly burden and headaches of these properties. After they are gone, all we will have left to deal with is the capital gains issue. I don't regret one minute filing the BK and haven't felt this relaxed in many years. I've learned a lot over this process and, for me, it is trusting God to work things out. Whether we are able to work out an Offer in Compromise with the IRS, an IRS re-payment plan, have to file Chapter 13 for the taxes, or God provides the income to come in to pay it off out-right, I no longer worry about it. IMO, God has seen us through too much to think He will fail us now. Wishing you the best!

[debee]

... in determining the capital gains on my foreclosed (and short sale) properties, the market value is determined by the amoount owed at the time of the BK.

The FMV you use to calculate capital gains is the amount on the 1099-C, which is the gross bid price at the foreclosure auction. If you got a 1099-A instead of the 1099-C, or if you did a deed-in-lieu, they will have used the "appraised value" at the time of the transfer. If you were an actual foreclosure, find out what the foreclosure price was and dispute the amount on the 1099-A if it is higher.

If your debts were recourse, you need to run a few calculations:

1.) principal before transfer minus deficiency balance, or FMV as described above, whichever is less.
2.)Take that number and add to it any proceeds you rec'd from the foreclosure sale.
3.) Take that number and subtract your adjusted basis. Your adjusted basis is found by taking the price you paid for the house, add any capital improvements, subtract your depreciation.

If your loan was nonrecourse, then you start the above calculation with the principal balance in step one.

The final number is the amount you will have to pay capital gains on. You add it to your taxable income (line 43 of your 1040) and you will be taxed according to your marginal rate. So, if you're in the 15% margin, you will pay 0% long term capital gains. If you are over the 15% margin, you will pay 20%. In 2013, the rates are scheduled to go up. Depending on your figures, there may be things you can do to lower your taxable income in order to land in that 15% margin.

Of course this is general & doesn't factor in any fine points, but might give you some peace until your CPA comes up with the exact figure based on all the tricks up her sleeve and your particulars.

[SleepWellNow]

Thank you debee. That is a lot of valuable information. I am in California so I believe my loans (athough refinanced) are non-recourse. That being said, am I to understand step one is the amount owed at the time we filed BK and not the FMV? I'm also a little confused on capital gains tax rate. I thought 15% was the maximum for long-term capital gains tax in 2010. Thanks for your help!

[debee]

Thank you debee. That is a lot of valuable information. I am in California so I believe my loans (athough refinanced) are non-recourse. That being said, am I to understand step one is the amount owed at the time we filed BK and not the FMV? I'm also a little confused on capital gains tax rate. I thought 15% was the maximum for long-term capital gains tax in 2010. Thanks for your help!

Purchase money loans are non-recourse, but refinances are usually recourse. I think it depends what you spent the money on.

Step one is the lower of those two possible values: FMV on the 1099 (which in case of foreclosure ought to be the gross bid price and not the appraisal), or principal balance only (no fees) less the deficiency balance.

Yes, 15% is the maximum rate for this year. But if your taxable income (line 43) plus whatever amount is subject to capital gains tax puts you in the 15% tax bracket, you pay zero for capital gains. Oh wait, I see, I said 20% in my last post. Sorry. That's what it goes up to in 2013. My mistake.

eta: I'm just not sure about refinances. There's a blurb at the CA state tax website that refinances are recourse loans. I've seen that elsewhere as well. I've also read that if the lender already went through the foreclosure process and did that via trustee sale, they lose their recourse option via the one-action rule. But judicial foreclosures are allowed in CA and can be used in order to pursue deficiency judgments at time of foreclosure. However if you filed BK and then surrendered the properties, there's no point for the lender to go the expense. Hopefully someone else will chime in and sort it out.