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Old 03-26-2017, 10:21 AM
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Question How to calculate capital loss from foreclosure of rental property (nonrecourse debt)

Had a rental property that was foreclosed upon. Debt was nonrecourse. Trying to determine the amount of the capital loss. Balance of loan was $213,480. Purchased property for 267K, had an a/c repair for 3K, and took depreciation in amount of 42K. So I believe the adjusted basis would be about 234K (purchase price plus improvements minus depreciation). I understand that for nonrecourse debt, the amount realized is the higher of the balance of the loan or FMV. Balance is higher. So I am calculating the amount realized as $213,480 - 234K, which equals about a loss of about 20K. Please let me know if this is correct. Thanks for your help.



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Old 03-26-2017, 05:33 PM
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Had a rental property that was foreclosed upon. Debt was nonrecourse.-->In general, once the type of mortgage is determined, you can compute the gain or loss resulting from foreclosure. The gain or loss on foreclosure is computed the same way as a normal sale of property, which is the amount realized less the adjusted basis of the property. In a foreclosure involving a non-recourse mortgage, the amount realized is the mortgage balance. For example, say, you purchased a property for $400k with a down payment of $50k and a mortgage of $350k. Home values rose over the next few years and you refinanced the home for its full value at the time or $500k. The housing recession hit you by surprise and say 3 years after you refinanced, your home was worth $430k and the mortgage was paid down to $450k. since the mortgage was non-recourse FMV = $430k. Adjusted Basis = $350k. Mortgage Balance= $450k.
you would recognize a capital gain of $100K. As stated earlier, the gain or loss will be the excess of the amount realized (mortgage balance of $450k) over the adjusted basis of the property $350k. The FMV is irrelevant when the mortgage on a property in foreclosure is non-recourse. Also, this type of foreclosure cannot result in income from the cancellation of debt.in a non-recourse mortgage the lender is only able to seize the borrower?s property and sell it to recover losses. To the extent the property is sold for less than the amount the borrower owed, the lender bears the risk of loss.

Trying to determine the amount of the capital loss. Balance of loan was $213,480. Purchased property for 267K, had an a/c repair for 3K, and took depreciation in amount of 42K. So I believe the adjusted basis would be about 234K (purchase price plus improvements minus depreciation).=======>>I think so; The adjusted basis is the same which is the original cost of the property plus additions less deductions depreciation, casualty loss. You neeed to determine the original basis of the rental property and also additions or capital improvements made to the property.

I understand that for nonrecourse debt, the amount realized is the higher of the balance of the loan or FMV. Balance is higher. So I am calculating the amount realized as $213,480 - 234K, which equals about a loss of about 20K. Please let me know if this is correct====>as mentioned above; If a borrower defaults on a non-recourse loan, the lender is limited to foreclosing on the home to satisfy the debt. Even if the lender recovers just a small portion of the outstanding mortgage debt, the lender has no further recourse and cannot obtain a personal judgment against the borrower..Most states allow a lender to obtain a deficiency judgment, but typically there are restrictions. For example, usually the deficiency is limited by the FMV of the property say if the total debt is $200K and lender bids $150K at the foreclosure sale and purchases the property, the deficiency is $50K. Generally, this means the lender could file a subsequent action where it would be granted a deficiency judgment for $50K and be able to collect that amount from the borrower. However, if the FMV of the property is really $175K, the lender could only obtain a deficiency judgment in the amount of $25K.
Since the lender is typically the only bidder at the foreclosure sale, the FMV limitation prevents a lender from making an extremely low bid in order to collect a big deficiency judgment. With a nonrecourse mortgage loan, the lender cannot do anything other than foreclose on the property. The lender may not obtain a deficiency judgment even if the sale proceeds do not repay the total debt owed on the loan.



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