renting out my property in foreclosure, tax questions

[rjsdsu]

OK Y'all, what am I missing here?

Fall 2009 Stopped making payments (did not pay property tax but am current w/ condo assessments)
Summer 2010 Bank started foreclosure proceedings
1.5 years go by, cannot explain the lag of the servicer attorneys.
Fall 2012 Filed Chapter 7 (property in recourse state and wanted to rid liability plus income going up and one chance to take advantage of the means test) By the way, if you were following my prior posts, the auto liens worked, no questions asked--but that is another thread.
Jan 2013 Discharged
Expect foreclosure to finalize sometime in 2013

Renting property to third party during this whole debacle
File taxes showing 10k loss (rental income less HOA dues and depreciation) Depreciation is huge!!!
For 2010, 2011 and 2012, because of depreciation I am running through a 10k loss on my 1040 return

Is this an additional windfall for me or what? (aside from collecting a nominal rental income while not paying mortgage)

Getting a little greedy here, but currently renting and have a 3rd bedroom with only a computer in it. I honestly use this computer 1x/year-to do my taxes, thinking of taking an additional deduction against the rental property for home office. (IRS allows appx 25k loss cap for rental property in my situation).

No judgments please--just trying to make ends meet. Comments welcome.

[tobee43]

i'm one of the those that do not agree with renting a house in foreclosure UNLESS you are the one in many that do it the legal and right way. by that i mean, showing the rental income depreciation, costs, etc. on your tax return and that's exactly what you have done!

until the house is out of your name it's YOUR house. you could have stayed and not paid. i know people going on 6 years still awaiting a foreclosure. i wouldn't push it with the home office it's really not worth it and it has to be a rather large percentage of your home it's gets sticky, sounds like you are doing fine just with what you are doing.

[HHM]

Have you read the guidelines on the "home office" deduction. I am not sure you would really qualify if push comes to shove. I think you have a hard time showing "regular" use for renting your house.

Read IRS publication 587. Personally, I think it is a stretch.

Also, a side note, you need to be careful with depreciating your now rental. You might accidentally end up with a capital gain when the house forecloses. I know, it sound odd, but if the stars align (against you), it is possible. If you have been renting the house for the last 3 years, it sounds like you have more non-qualified use than qualified use in the past 5 years (meaning, the IRS will no longer consider it a primary residence and you may not be able to claim some or all of the cap gains exemption on sale of primary residence, $250,000). If you depreciate, you decrease your tax basis (creating an adjusted basis) on the house for purposes of cap gains. A foreclosure is still a sale of real estate, and for cap gains, it DOESN'T matter if you actually get any money. Here is a simple example to illustrate.

This example is merely for illustration.
Real estate investor buys a property for $150,000. He owns and rents the property for 6 years. Each year, he depreciates the house for $12,000, and has made no improvements.
So, in year 7, his adjusted basis is $72,000. The real estate bubble blows up, this investor ends up letting the home foreclose and it sells at foreclosure for $90,000
Guess what, this real estate investor has a Capital Gain of $18,000.
This is the scenario you need to watch out for when you get a 1099-A.

[tobee43]

ahhhhhhhh, yes, hhm, those sneaky capital gains, which even are larger if the property value increases.

now, how does one handle a capital gain with a foreclose piece of property that one has been claiming depreciation? now that's a tax question? (one i have never come across).

[HHM]

ahhhhhhhh, yes, hhm, those sneaky capital gains, which even are larger if the property value increases.

now, how does one handle a capital gain with a foreclose piece of property that one has been claiming depreciation? now that's a tax question? (one i have never come across).

Exactly as I described. The taxpayer will need to calculate an adjusted basis. The bank will send a 1099-A and if the adjusted basis is less than the sale price on the 1099-A, the taxpayer has a cap gain...it is that straightforward. (albeit, calculating the basis and adjusted basis is NOT a very straightforward process). Unless the taxpayer has offsetting cap loses, the taxpayer will pay tax on that gain at the applicable rate. (pretty evil, I know).

The fact that the house was foreclosed, or that it was underwater, or that is was BK'd has no bearing. This situation is not like forgiven debt income where there are exceptions like BK or insolvency.

[tobee43]

i'm just wondering if at the time of the sale if one had a cap loss, (which one can usually only deduct 3k annually on that cap loss, or at least that is the way they want it handled), if when sold the entire remainder of lost can then be applied. (i think i answered my own question) since one can no longer carry over the capital loss.

it just is remanence of one acct i work with, i think the cap loss will continue for the next hundred years of so if that property continues to be owned by the family.

one would likely think the bk or insolvency would cover any gain if that were the case.

[rjsdsu]

Awesome insight...thank you so much. It would be very unlikely I would have cap gain if auction this summer. lets assume 20k cap loss, possible to take 3k cap loss deduction next seven years. wow, I will have to look into this.

Also, fyi I rent to friend who is 100% informed of situation. heck, he may even get cash for keys.

[HHM]

i'm just wondering if at the time of the sale if one had a cap loss, (which one can usually only deduct 3k annually on that cap loss, or at least that is the way they want it handled), if when sold the entire remainder of lost can then be applied. (i think i answered my own question) since one can no longer carry over the capital loss.

it just is remanence of one acct i work with, i think the cap loss will continue for the next hundred years of so if that property continues to be owned by the family.

one would likely think the bk or insolvency would cover any gain if that were the case.

Last I checked, you don't get to take a capital loss on a foreclosure, (it is considered an abandonment of real estate). Kinda sucks, they will get you on the gain, but not let you take the loss. Look at IRS pubs 544 and 4681.

[tobee43]

Last I checked, you don't get to take a capital loss on a foreclosure, (it is considered an abandonment of real estate). Kinda sucks, they will get you on the gain, but not let you take the loss. Look at IRS pubs 544 and 4681.

well it's tax time now...(don't we all know) and i'm working on many. when i have some time i really want to bite into this one. why? while i understand 544 and 4681, depending on what type of the loss, not just the value, i want to check on exceptions if any, based on that the capital loss is based on. since lets use the example that one experienced a capital loss in 2000 for the amount of 100,000. that loss was realized that year. for the next 12 years one can only claim the 3k...a whopping 36k out of the 100k. the balance as we know, is carried from year to year, i'm not really certain if that's void once you either sell or foreclose on the property? one still had and retains the loss; again depending on the basis of the loss.

since the capitol loss is or was never or not based on a canceled debts, foreclosures, repossessions, and abandonment, i'm not so certain about 4681, i think that's more applicable to "in the moment".

also, pertaining to 544, i'm going to have to once again say what is the basis of the gain or loss. if one sustained a substantial personal capital loss on one's property years prior to filing of a bk, i would likely think they would be able to continue to claim that loss. since the original loss would have nothing to do with it's current status, whether it's foreclosure, (or abandoned, etc.).

turning the corner if those losses were experienced during that tax year one filed for bk, they would not be able to use them.