? for real estate Investors regarding depreciation during foreclosure

[porkchopcash]

I have not made payments on my investment properties for 14 months because I was attempting short sale.
Not gonna happen and so I will be doing a non-consumer bk7 in about a month.

Tax time question? I will be checking with my accountant but can't get into to see the one who deals with real estate right now. Just wanted to know anyone's experience.

My though is that although I did not make any payments and had no income from properties last year, I still owned them and therefore should be entitled to depreciation deductions on taxes. Anyone done this?

Also, is there some way of depreciation being recaptured after short sale or foreclosure? Just don't want to get hammered on recapture.

[frogger]

I'm not an accountant by any means, but you should be able to take your depreciation regardless of the other circumstances. My choice on real estate was to bk and then let the foreclosure happen, which eliminated any tax problems. If you are filing for bk, I'm not sure that having a short sale or foreclosure before the bk would be the best way, however please.... find that accountant!

[porkchopcash]

Thanks for the reply Frogger.
Was it your experience in BK then foreclosure that there was no recaptured depreciation or tax liability.
How long had you owned your properties and was there a lot of depreciation?

Yes I plan for all foreclosures and short sales to take place after BK. I think that would be the preferred method.

[justbroke]

My though is that although I did not make any payments and had no income from properties last year, I still owned them and therefore should be entitled to depreciation deductions on taxes. Anyone done this?

No income? Were you collecting rents? In any event, you own them, so you can do depreciation and claim taxes paid.

Also, is there some way of depreciation being recaptured after short sale or foreclosure? Just don't want to get hammered on recapture.

Yes. When I did my paperwork for the foreclosure (1099-A/C), I had to fill it out just like it was a sale, and the depreciation had to be recaptured. In my case, it really didn't add up to much because that specific property foreclosed for 50% of value and I had only claimed depreciation over 4 years.

I'm not an accountant either.

[porkchopcash]

JB,
Properties went empty and I did not attempt to fill them because I did not want to get caught in any type of rent collection / not making payments fraud situation.
Maybe I could have rented and made money but it was more important to me that I be able to sleep at night.

Curious what you mean by "property foreclosed for 50% of value". Was that the amount owed on the loan.

[justbroke]

Curious what you mean by "property foreclosed for 50% of value". Was that the amount owed on the loan.

I purchased the property for $189K and it sold at auction for $94K. I think I owed $150K on the loan at the time.

[SweetGeorgia]

We actually did it the other way around (foreclosures before bankruptcy), which had its advantages.

I was afraid of property-related costs if we had filed first. I don't know if the rents would have covered costs, or even whether we would have received the rents (they were separately liened).

So we got rid of the properties, and then the banks sued us for the deficiencies. Eventually we filed Chapter 7 with those big unsecured business debts (deficiency judgments), no business income, and no property.

Finally, I think you use the foreclosure prices as "disposition" prices for tax purposes. But you don't know ahead of time what the foreclosure price will be, so it's a little hard to plan around that. In any case, I believe you do get to take depreciation until you dispose of the property. It's worth seeing your accountant to ask, though!

[porkchopcash]

SweetGeorgia,
I have chosen to go ahead and file non-consumer bk7 before foreclosures because I have 12 properties and am hoping that the bk causes the foreclosures to be accelerated. If I wait for 12 foreclosures to turn into deficiency judgments before filing I could be waiting another 2 years the way the banks are dragging their feet now. Rent income is not an issue for me.

My accountant has agreed that I can take depreciation until such time as the property has sold. So therefore I will get it for all of last year and then some of this year. However, my accountant seems to believe that the "sold" price for the houses as it relates to recaptured depreciation will be the amount owed on the properties. Obviously, the disposition price would be of a much greater advantage to me. The houses should be sold by the time taxes are due next year.
Do you have any information you can point me to that shows the disposition price being used. I think I may need to educate my accountant.

[debee]

Whether the disposition price is the amount of debt or the FMV depends on whether or not the loans were recourse. IRS Pub 544 is worth a gander. I can't remember which publication covers capital gains/losses but that's worth looking into as well. Especially if you've been depreciating/refinancing for any length of time. Ouch. Hope it all goes your way.

[porkchopcash]

debee,
My reading of the irs publications and a few accounting forums online leads me to the following conclusion.
In a recourse state, which mine is, the "sale" price for tax reporting purposes will be the FMV of the property as reported to me by the lender on 1099.
If that is the case I should be ok because the FMV of these properties will come in below the basis value after depreciation.
If I am not understanding some of this please correct my thinking.
Thanks for your help

[debee]

That sounds right to me, but like you I'm not an accountant. I think the FMV they use is the gross foreclosure bid price and not the FMV that a real estate agent would come up with, unless it is a case of "abandonment" or DIL in which case they use the appraised value. My info comes from the same sources you used and I don't know the fine points. Keep us posted what you find out and how things go with you.

[porkchopcash]

debee,
Another interesting factor is that there is usually cancellation of debt (cod) income which is offset by the "loss" suffered on the disposition of property.
However, with bankruptcy the cod is non-reportable as the bk qualifies under the insolvency provision.
Yet if you use the FMV I will suffer a "loss" on all of these properties. This translates into a Net Operating Loss and can be carried forward or backwards to offset other income. This seems too good to be true, but I can find nothing to contradict it.
Have you seen anything else on this?

[biotechsolution]

I have not made payments on my investment properties for 14 months because I was attempting short sale.
Not gonna happen and so I will be doing a non-consumer bk7 in about a month.

Tax time question? I will be checking with my accountant but can't get into to see the one who deals with real estate right now. Just wanted to know anyone's experience.

My though is that although I did not make any payments and had no income from properties last year, I still owned them and therefore should be entitled to depreciation deductions on taxes. Anyone done this?

Also, is there some way of depreciation being recaptured after short sale or foreclosure? Just don't want to get hammered on recapture.

Were the properties empty?? You didn't receive any rent for the last 14 months either? If you and no income for the last 14 months from them you should be abe to claim more than just depreciation.

[porkchopcash]

bio,
What else do you mean? They were empty, I really did not put anything into them expense wise for last 14 months.

[debee]

Yet if you use the FMV I will suffer a "loss" on all of these properties. This translates into a Net Operating Loss and can be carried forward or backwards to offset other income. This seems too good to be true, but I can find nothing to contradict it.
Have you seen anything else on this?

COD is not a problem in bk, but capital gains/depreciation recapture is what comes back to bite. If you're going to be a loss on all your properties, you're lucky.

Tax attributes (such as loss carryforwards) will become property of the bankruptcy estate when you file. (They do in consumer bk, not sure if it's different in non-consumer).