When you abandon property, you voluntarily and permanently give up possession with the intent to terminate your ownership, so it is just the same as disposing of the property. Abandonment represents a total loss of your investment or interest in the property. If the property is business or investment property, you may have a deductible loss and the loss may be an ordinary loss, as opposed to a capital loss, even if the property is a capital asset. The amount of the loss is the adjusted basis of the property at the time of the abandonment and the loss is deducted in the year the loss occurred.
Note: you cannot deduct any loss from abandoning your home or other personal use property.
For example, if you purchased your home, say in February 2008 for $200,000 and 3 months later you lost your job causing you to default on your payments. Eventually you abandon your home by permanently moving out on August 8, 2008. At the time of the abandonment, the mortgage loan balance was $188,000 and the fair market value was only $155,000.
As a result, you have a nondeductible loss of $200,000 or the adjusted basis on the property. The rules associated with foreclosures and repossessions must be followed when the lender subsequently forecloses or repossesses the property.
If you are liable for the debt secured by the abandoned property, and the debt is cancelled, you have ordinary income equal to the cancelled debt. This income is separate from any loss realized from the abandonment and must be reported on your tax return unless you qualify for an exception or exclusion.
The lender normally furnishes a Form 1099-A, Foreclosures and Abandonment, to figure your loss. However, if the lender later cancels the debt, you will receive a Form 1099-C instead of the 1099-A that includes the information about the abandonment.
The same exceptions that apply to foreclosures and repossessions also apply to abandonment. This income does not have to be reported as ordinary taxable income if the cancellation was intended as a gift, the debt was qualified farm debt or qualified real property business debt, or you were insolvent or bankrupt.
If you are faced with this tax nightmare, please contact us immediately for tax relief!!