Depreciation Recapture

[LandOnMyFeet]

What is the best way to handle/minimize/cram down/eliminate depreciation recapture on rentals that have been surrendered via foreclosure or bankruptcy?

[justbroke]

That is as much a tax question as it is a bankruptcy question. Unless despritfreya has an opinion, I do not think that you are going to receive many answers (if any).

If the Trustee takes the properties in the bankruptcy, you would not have any tax because the bankruptcy estate itself is a new taxable entity and that entity would deal with taxes. If the Trustee abandons the properties and they revert back to you, you may have a tax issue. I just can't answer what the tax implication would be or even how to reduce your liability.

[LandOnMyFeet]

As I read IRS Pub 908, the Trustee take sit from me assuming all the basis, installments, etc. which isn't considered a transaction. If I let the property go to foreclosure outside a bankruptcy it's considered a forced sale subject to depreciation recapture. If the property is in the bankruptcy trust and then given back to me , it's not a transaction but I assume all the basis, installments etc. I just can't find where it says the trust assumes everything and then transferred to creditor. Interesting question. I'm taking about a tax liability of $52,000 not a depreciation recapture amount. If this is a real tax liability when I finish my Chapter 7 I'd most likely have to file a chapter 13 to stretch out the tax liability to 5 year repayment plan..

[despritfreya]

Can't help with this one. Sorry.

Des.

[justbroke]

LandOnMyFeet you're going to need to speak with a bankruptcy expert who may also have tax experience and/or a licensed tax professional experience with this specific scenario.

I would not be guessing at this at all. It demands a professional review.

[nohoneymoney]

By all means talk with a CPA familiar with post BK foreclosure on rental property and have a good set of records for review. I had many rental properties and some were foreclosed post BK. The IRS considers a foreclosure to be a sale, even post BK. In each case our CPA reduced the basis of the property by the amount of depreciation. Some showed a profit and some a loss.