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DW runs our rental properties but I do the taxes. This taxable year (2013) she had negotiated a price for the sale of one of the properties when it was foreclosed and was going to auction. She brought her intended buyer to the auction and he got the property at the price they had negotiated. Then, after the dust settled, we got a check from the bank (that did the foreclosure). It was called "excess funds." We haven't received anything else from the bank at year end (e.g., a 1099). My question is how I report all this on the tax form(s). I'm not even sure what tax forms)(s) I need to use. --Is it just a foreclosure, rather than a sale? (Is that as if we sold the property for $0?) Do I have to go back and do a recapture of all the depreciation we took? Are the "excess funds" reportable as (ordinary) income?

I'd appreciate any help on this. It's probably not the first time that anything like this has ever happened -- but it's the first time that it's happened to me!

TIA

culcha
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The sale price isn't zero.

There was a loan on the property. If you were returned excess funds, then the sale price was more than enough to pay the loans and liens against the property.

At the time of the foreclosure were you given a detailed statement of the loan balance, fees and other liens that were paid?
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At the time of the foreclosure were you given a detailed statement of the loan balance, fees and other liens that were paid?

I'm not really that involved in the rentals -- but I'll have to ask whether DW has such a thing.

Is this then to be treated as a sale?

Also -- does it make any difference that the property was once our primary residence?

culcha
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Also -- does it make any difference that the property was once our primary residence?

culcha


The principal residence exclusion requires that it was your primary residence for at least 24 months of the 60 months prior to sale.

You don't have enough information to know if you have a recaptured depreciation or even if you have profit or loss.
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The principal residence exclusion requires that it was your primary residence for at least 24 months of the 60 months prior to sale.

You don't have enough information to know if you have a recaptured depreciation or even if you have profit or loss.


We've been renting that place out for about 10 years now. So aren't I going to have to recapture depreciation?

I know the original basis. And if I get the amount of "excess funds," what else do I need to figure profit/loss?

culcha
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The principal residence exclusion requires that it was your primary residence for at least 24 months of the 60 months prior to sale.
.........
We've been renting that place out for about 10 years now. So aren't I going to have to recapture depreciation?


Technically, no, you shouldn't. Now, the depreciation taken will reduce your basis, and thereby increase your gain. But if it's only been a rental for 10 years, it all should have been straight-line depreciation. So it's not "recaptured", which means treated as ordinary income on sale. It's that other category, "Unrecaptured Section 1250 gain" that you see on various 1099s or K-1s. It's still capital gain, but the maximum rate goes up to 25%.

I know the original basis. And if I get the amount of "excess funds," what else do I need to figure profit/loss?

Your proceeds will be the loan payoff from the foreclosure PLUS the "excess funds" received. That amount, compared to your adjusted basis (after depreciation) will be your gain/loss.

And you report the gain/loss on Form 4797, and from there the net capital gain flows to Schedule D. But if it's a net loss, it's ordinary. And gain on any personal property involved will also be ordinary. Any gain on personal property is recaptured as ordinary to the extent of depreciation taken.

Bill
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Your proceeds will be the loan payoff from the foreclosure PLUS the "excess funds" received. That amount, compared to your adjusted basis (after depreciation) will be your gain/loss.

And you report the gain/loss on Form 4797, and from there the net capital gain flows to Schedule D. But if it's a net loss, it's ordinary. And gain on any personal property involved will also be ordinary. Any gain on personal property is recaptured as ordinary to the extent of depreciation taken.


I think I've got it now! THANKS!

culcha
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