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I know the typical advice is to consult a CPA or attorney, but my experience is that you guys here know way more than most "professionals". I have actually asked several CPAs / EAs about this in the last few weeks and can't get a straight answer so I thought I'd pose the question here.

I was the lender on two properties that I foreclosed on this year for a "loss". Using easy numbers, let's say I had 800k cash into the loan, and when I foreclosed, I bid 600k and no one bid higher, so I took the properties back with a 200k loss on paper.

My question is, does the IRS consider this a loss, and can I use it to offset other income this year?

One CPA said yes, absolutely. Several others have said it isn't a loss until I sell to a third party.

Thoughts? Thanks in advance.

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I believe you can take the "loss" now because you already foreclosed which established a market bid on what your loss was.

You would have to file some paper work though that involves the individuals that defaulted on you. It's basically paper work that says you are letting the off the hook for the loan 100% and writing it off. This will shift the tax burden of your "loss" to them as a "gain". Obviously you cannot attempt to collect on the debt after though.

So you would first have to decide if you are willing to give up your right to collect this debt 100% or not. Depending on the state you already cannot collect anyways.

As for offsetting against other income it depends on what kind of income obviously. You could not offset W2 income but if you had other investment gains you can offset against that.

I'm not a CPA though or anything this is just my laymen understanding of the tax code.

Sorry, I am a little bit confuse here.
You lend money, $800k to yourself to buy a property, and you foreclose?

bbmak said:   Sorry, I am a little bit confuse here.
You lend money, $800k to yourself to buy a property, and you foreclose?

No - I was the lender, I lent a 3rd party 800k and they defaulted so I foreclosed and took the property back after bidding 600k for it at auction with no higher bidders.

It is effectively a REO property with me being the bank (although I am sure the tax laws are different for actual banks, which I am not)

I am in CA btw

These are 2 different transactions.
-First you lend $ to someone to buy a house. Own no title of the house, but maybe a security interest. This is a capital investment. And, the person default on the loan. So, You take the capital loss.
-You go to the auction, and buy a house.

How much the borrower pays you back after the auction? 600k?
If 600k, I see a 200k capital loss. The loss is 800k-whatever they pay you back. $3,000 capital loss deduction of ordinary income, the reminder get carryover.

You buy the foreclosed property from an auction, I see this is a new investment position. so 600k is the foreclosed property basis.

mchas said:   bbmak said:   Sorry, I am a little bit confuse here.
You lend money, $800k to yourself to buy a property, and you foreclose?

No - I was the lender, I lent a 3rd party 800k and they defaulted so I foreclosed and took the property back after bidding 600k for it at auction with no higher bidders.


You essentially bought it from yourself.. Or tried to establish a minimum bid and had no takers.
I'd ask more CPAs - ones with RE experience. I guess it all comes out in the wash. If you end up selling it for $700k, you'll show a $100k gain on next year's taxes, so it's not like you're avoiding taxes here.

dcg9381 said:   mchas said:   bbmak said:   Sorry, I am a little bit confuse here.
You lend money, $800k to yourself to buy a property, and you foreclose?

No - I was the lender, I lent a 3rd party 800k and they defaulted so I foreclosed and took the property back after bidding 600k for it at auction with no higher bidders.


You essentially bought it from yourself.. Or tried to establish a minimum bid and had no takers.
I'd ask more CPAs - ones with RE experience. I guess it all comes out in the wash. If you end up selling it for $700k, you'll show a $100k gain on next year's taxes, so it's not like you're avoiding taxes here.


Correct. However, this is a property I plan on owning for a very long time, and if I do ever sell I could 1031 into another property, so I will not be paying the taxes for many years if ever. That's why I figure I should take the loss now if I can and worry about the gain much later.

Everything you need should be in here: http://www.irs.gov/pub/irs-pdf/p4681.pdf

My inclination is to say you have a 200k loss on loan, which would be 200k in income to the borrower when discharged. The borrower has a loss of 200k + whatever other basis they had in the property before the repossession, and you now own the properties with a 600k basis.



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