We had a rental house foreclosed. Are we going to have to recapture depreciation? Is this to be treated just like a regular sale of real estate?Yes and yes. The foreclosure of a rental property is treated like the sale of the property. IRS Pub 544 http://www.irs.gov/pub/irs-pdf/p544.pdf says:Foreclosures and RepossessionsIf you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. This is true even if you voluntarily return the property to the lender. You also may realize ordinary income from cancellation of debt if the loan balance is more than the fair market value of the property.Buyer's (borrower's) gain or loss. You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. See Gain or Loss From Sales and Exchanges, earlier.AJ
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