Ch7 and foreclosure on investment property - Can I take a tax loss?

[considering7]

In 2006, I purchased with cash (no mortgage) a piece of investment property (no house on it, just land) that I for $60,000. In 2007 I used it as collateral for a $200k business loan. (The $200k loan was granted to my LLC, but I personally guaranteed the $200k business loan and put up my $60k investment property as collateral. The remaining $140k was unsecured.).

In 2011 the business fails and I filed personal Ch7 to relieve myself from the personal guarantees, and was discharged in June 2011. The bank holding the $200k note sent me a letter that they are foreclosing on the land, which I was expecting.

Does the IRS allow me to take the deduction for the captital loss of my investment in the property? I figure it was a $60k purchase/basis cost and the foreclosure is essentially a sale for $0.00.

[AbbeyA]

My DH's business failed in 2009 after his employees left and took the biggest projects and started their own company. Anyway, we have been able to deduct the "loss" of the business on our personal taxes and carry it forward until the entire amount has been accounted for. Your accountant should be able to answer the question more specifically -- we used the same accountant for the business taxes and our personal taxes. We still use him now, even though the business is gone.

[jst4f]

Real estate is different from a business loss. I believe you only get the difference between the $60K and what the bank gets at the foreclosure sale and not the full $60K. Check with your accountant to be sure.

[HHM]

I don't think your basis calculation is correct given the secured loan.

But in any event, generally, you DO NOT get to take a capital loss on a foreclosure.

[Ifonly]

HHM, I believe you're thinking of a foreclosure on a principal residence which is deemed personal property and you may not take a capital loss (or any tax loss) on the foreclosure of personal property. However, this property was held for investment (no principal residence, no structure at all according to the OP); therefore it qualifies - usually Form 4797 is used. For a business investment, a foreclosure is treated as a sale. However, you definitely need a tax professional to work the through the tax attributes and insolvency issues related to the basis. There is an additional complication in that the personal guarantee/collateral possibly created shareholder basis in the business (you didn't say what type of tax entity the business was).