Avoiding the Tax Consequences of Foreclosures and Repossessions

In the current economic downturn, more taxpayers are going through foreclosures or having property repossessed when they can’t pay debts secured by property.  The last thing these people want to think about is taxes, but things could be worse…

In Taxation of abandonments, foreclosures and repossessions, posted on The Journal of Accountancy this month, Curtis Webley explains the options facing personal and business foreclosure scenarios, of which there are many. A recourse debt is the loan on a property being abandoned.  Once foreclosure or repossession procedures are completed, the tax consequences must be accounted for and they are different for properties that are used for personal versus business use.  If a property is for business use, the gain or loss on disposition is considered either a capital or an ordinary gain or loss, depending on the nature of the asset.  After foreclosure proceedings are completed, if the creditor forgives debtor any part of the debt, the forgiven portion is called “cancellation of debt” (COD) income and may be included in debtor’s gross income and reported separately from the gain or loss realized from the sale.

Nonrecourse debt, when debtor is not personally responsible for the debt, is treated differently.  Business or investment property that is abandoned in a nonrecourse situation takes the outstanding loan balance, compared with taxpayer’s adjusted basis in the property to determine gain or loss.  The loss in this situation can be a deductible.  A gain, though rare, can be considered income if it results from a discount for loan modification that reduces the principal, a COD income, even if debtor is not personally liable for the debt.

Microsoft Dynamics® GP can bring more clarification into the other assets that are important to your business operations.  With this comprehensive business management software, you can enter, depreciate, and retire fixed assets.  Having accurate data regarding assets will help you make better business decisions, report data to financial and taxing agencies appropriately, and see the impact the assets have on your business operations.

Tracking, calculating, and reporting on any asset is important to the health of your business and can have an impact on your bottom line.  It is always best to discuss specific tax-related concerns with your tax professional.  Contact eIS Business Solutions for more information about Microsoft Dynamics GP and how it can keep your financials under control.

By Robert Smith of eIS Business Solutions, Microsoft Dynamics ERP and CRM Partner out of California

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