What's the Sales Price on a Foreclosure?

Anyone? Help please.

Kirk

?

It depends on whether the loan is a recourse loan or not. They are treated slightly differently. See pub 544 "Sales and Other Dispositions of Assets", there is whole section on foreclosures.

Foreclosed properties are generally sold at an auction. The lender generally bids the amount remaining on the loan and that's often the highest bid. It doesn't mean that's the value, however. But if the property was foreclosed on, there really isn't any cancellation of debt income, since you gave something in exchange for it that should have had a basis higher than the amount owed. I'm not an expert on this, but it seems to me that you only have gain if your basis was less than the amount left on the loan, to the extent of the difference between those two amounts. Or if the property is sold at auction for more than what is owed to the bank, you may end up with money in your pocket so there may be taxable income in that case. You really need to talk to a local tax pro, who can properly analyze your specific situation. Stu

Your amount realized (or, as you call it, "sales price") is $200,000 - the fair market value of the property foreclosed on - plus any cash you received. The $50,000 of debt cancellation income reported to you on Form 1099-C is handled separately and is not treated as part of the amount realized on disposition of the property. See Treas. Reg.

1.1001-2. See also the following IRS FAQ(skip the first paragraph and start with the section headed "Why is it that I may have both gain (or loss) and COD income upon foreclosure of my house?":

Sales proceeds (cash received + debt forgiven) - basis (acquistion costs + capital improvements - depreciation allowed or allowable) = Gain or Loss Losses on personal use property (such as a personal residence) are not deductible.

Sales proceeds (cash received + debt forgiven) - basis (acquistion costs + capital improvements - depreciation allowed or allowable) = Gain or Loss Losses on personal use property (such as a personal residence) are not deductible.

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In this case, so long as the mortgage, or other debt, secured by the house was recourse (i.e., it was a personal liability of the owner), the amount of debt forgiven by the creditor is not included in the amount realized (i.e., the sales price). Instead, that amount will be treated separately and, to the extent not excluded under Code Sec.

108, will constitute ordinary income. See Treas. Reg. 1.1001-2. The reason for this is that the owner of the house is treated as paying off part of the debt with the FMV of the house; however, because the debt is a personal liability, the transfer of the house does not extinguish the remainder of the debt, which continues to be a personal liability of the owner. If the creditor then forgives or discharges the remainder of the debt, that is a separate transaction in which the debtor/owner will recognize income from the cancellation of indebtedness unless that amount is excluded under Code Sec. 108. Thus, the amount realized (i.e., sales price) on disposition of the house in foreclosure is the fair market value of the house, plus any cash and the FMV of any property received by the owner.

I don't understand that.

He never *received* the $200,000, so why is that "realized"? He *received* $50,000 worth of debt cancellation, plus any cash actually received after the foreclosure.

That says that if the FMV were _under_ $50,000, then the difference between FMV and $50,000 is COD income; that isn't the case here. Seth