Depreciation recapture after foreclosure in bankruptcy?

[yankee14]

Diane

Here's my issue:

Former primary residence put into residential real estate in mid-2006. Renters in unit since then but still have taken a consistent loss when all was said and done. Depeciation taken since '06 will reach some 30k (including prorated this year up until sheriff's sale, correct?) in sum. Chapter 7 bankruptcy filed and discharge granted in 09, and foreclosure/sheriff's sale occurred in late '10. Renter now out. As I understand it, there will be no COD income as a result of the bankruptcy. But how is the depreciation handled? Is it recaptured as if bankruptcy didn't occur? Or does it evaporate with the discharge? What figures do I use to account for all this on my return? We paid 202 k initially and had 186 k due at filing, which was discharged. The adjusted basis will end up being about 170 k after taking depreciation allowances into account. The bank's bid-in was 204k (which I presume is an accounting trick to deal with losses or to make redemption more difficult by adding otherwise discharged "costs and fees" into the mix-in any event not one of my concerns). The actual FMV, based on market comps and tax assessments, should be in the neighborhood of 106-160k (with the low end reflected by actual sales and the high end reflected by the county assessor). We have received no 1099c and I have no idea whether the lender will be sending one, and from my previous dealings with them they probably have no idea either. I've researched this ad nauseum and can't seem to find out exactly what to do, and I am not too confident any accountants in my city have much of a clue either, based on my preliminary discussions with a few of them. I'm just trying to wrap this property up the right way. I'm used to doing all my research solo and then using Turbo Tax, but this is a bit more than I'm used to-would such a paltform ultimately work for this, assuming there is a straight answer for this? Thanks for any help.

[Diane Kennedy]

Complicated question, you're absolutely right. I'm not sure Turbo Tax will be able to handle it, but this is how it works.

Chapter 7 bankruptcy filed and discharge granted in 09, and foreclosure/sheriff's sale occurred in late '10. Renter now out. As I understand it, there will be no COD income as a result of the bankruptcy.

Let's start there. Did you get a Form 1099-C? If so, then you will need to report it on Form 982 and reduce the basis in your property. If you did not, don't report it (obviously nothing to report) and do not reduce your basis.

But how is the depreciation handled? Is it recaptured as if bankruptcy didn't occur? Or does it evaporate with the discharge?

It depends on whether you received a Form 1099-C. If you did, then file Form 982 and reduce your basis by the amount of COD income. If not, then it is reported as if the BK never occurred.

In either case, the depreciation needs to be recaptured and you can also take a deduction for any suspended losses.


We have received no 1099c and I have no idea whether the lender will be sending one, and from my previous dealings with them they probably have no idea either.

OK, didn't read this at first. Since you have no Form 1099-C, report the sale as is. It sold for the amount of outstanding debt on the property, you have your basis, you have the amount of recaptured depreciation, so you should have everything you need to report it. Don't rely on Turbo Tax to prompt you here. You'll need to be familiar with the law yourself and might need to do some overrides.