3.   Abandonments

Table of Contents

    You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership but without passing it on to anyone else. Whether an abandonment has occurred is determined in light of all the facts and circumstances. You must both show an intention to abandon the property and affirmatively act to abandon the property.

    A voluntary conveyance of the property in lieu of foreclosure is not an abandonment and is treated as the exchange of property to satisfy a debt; for more information, see Sales and Exchanges in Publication 544.

    The tax consequences of abandonment of property that secures a debt depend on whether you were personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt).

    See Publication 544 instead if you abandoned property that did not secure debt. This publication only discusses the tax consequences of abandoning property securing a debt.

    Abandonment of property securing recourse debt.   In most cases, if you abandon property that secures debt for which you are personally liable (recourse debt), you do not have gain or loss until the later foreclosure is completed. For details on figuring gain or loss on the foreclosure, see chapter 2.

    Example 1—abandonment of personal-use property securing recourse debt.

    In 2008, Anne purchased a home for $200,000. She borrowed the entire purchase price, for which she was personally liable, and gave the bank a mortgage on the home. In 2012, Anne lost her job and was unable to continue making her mortgage loan payments. Because her mortgage loan balance was $185,000 and the FMV of her home was only $150,000, Anne decided to abandon her home by permanently moving out on August 1, 2012. Because Anne was personally liable for the debt, Anne has neither gain nor loss in tax year 2012 from abandoning the home. The bank sells the house at a foreclosure sale in 2013. Anne will have to figure her gain or nondeductible loss for tax year 2013 as discussed earlier in chapter 2.

    Example 2—abandonment of business or investment property securing recourse debt.

    In 2008, Sue purchased business property for $200,000. She borrowed the entire purchase price, for which she was personally liable, and gave the lender a security interest in the property. In 2012, Sue was unable to continue making her loan payments. Because her loan balance was $185,000 and the FMV of the property was only $150,000, Sue abandoned the property on August 1, 2012. Because Sue was personally liable for the debt, Sue has neither gain nor loss in tax year 2012 from abandoning the property. The lender sells the property at a foreclosure sale in 2013. Sue will have to figure her gain or deductible loss for tax year 2013 as discussed earlier in chapter 2.

    Abandonment of property securing nonrecourse debt.   If you abandon property that secures debt for which you are not personally liable (nonrecourse debt), the abandonment is treated as a sale or exchange.

      The amount you realize on the abandonment of property that secured nonrecourse debt is the amount of the nonrecourse debt. If the amount you realize is more than your adjusted basis, then you have a gain. If your adjusted basis is more than the amount you realize, then you have a loss. For more information on how to figure gain and loss, see Gain or Loss from Sales or Exchanges in Publication 544.

      Loss from abandonment of business or investment property is deductible as a loss. The character of the loss depends on the character of the property. The amount of deductible capital loss may be limited. For more information, see Treatment of Capital Losses in Publication 544. You cannot deduct any loss from abandonment of your home or other property held for personal use.

    Example 1—abandonment of personal-use property securing nonrecourse debt.

    In 2008, Timothy purchased a home for $200,000. He borrowed the entire purchase price, for which he was not personally liable, and gave the bank a mortgage on the home. In 2012, Timothy lost his job and was unable to continue making his mortgage loan payments. Because his mortgage loan balance was $185,000 and the FMV of his home was only $150,000, Timothy decided to abandon his home by permanently moving out on August 1, 2012. Because Timothy was not personally liable for the debt, the abandonment is treated as a sale or exchange of the home in tax year 2012. Timothy's amount realized is $185,000 and his adjusted basis in the home is $200,000. Timothy has a $15,000 nondeductible loss in tax year 2012. (Had Timothy’s adjusted basis been less than the amount realized, Timothy would have had a gain that he would have to include in gross income.) The bank sells the house at a foreclosure sale in 2013. Timothy has neither gain nor loss from the foreclosure sale. Because he was not personally liable for the debt, he also has no cancellation of debt income.

    Example 2—abandonment of business or investment property securing nonrecourse debt.

    In 2008, Robert purchased business property for $200,000. He borrowed the entire purchase price, for which he was not personally liable, and gave the lender a security interest in the property. In 2012, Robert was unable to continue making his loan payments. Because his loan balance was $185,000 and the FMV of the property was only $150,000, Robert decided to abandon the property on August 1, 2012. Because Robert was not personally liable for the debt, the abandonment is treated as a sale or exchange of the property in tax year 2012. Robert's amount realized is $185,000 and his adjusted basis in the property is $180,000 (as a result of $20,000 of depreciation deductions on the property). Robert has a $5,000 gain in tax year 2012. (Had Robert’s adjusted basis been greater than the amount realized, he would have had a deductible loss.) The lender sells the property at a foreclosure sale in 2013. Robert has neither gain nor loss from the foreclosure sale. Because he was not personally liable for the debt, he also has no cancellation of debt income.

    Canceled debt.   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you will realize ordinary income equal to the canceled debt. This income is separate from any amount realized from abandonment of the property. You must report this income on your return unless one of the exceptions or exclusions described in chapter 1 applies. See chapter 1 for more details.

    Forms 1099-A and 1099-C.   In most cases, if you abandon

    • real property (such as a home),

    • intangible property, or

    • tangible personal property held (wholly or partly) for use in a trade or business or for investment,

    that secures a loan and the lender knows the property has been abandoned, the lender should send you Form 1099-A showing information you need to figure your gain or loss from the abandonment. Also, if your debt is canceled and the lender must file Form 1099-C, the lender can include the information about the abandonment on that form instead of on Form 1099-A. The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. For abandonments of property and debt cancellations occurring in 2012, these forms should have been sent to you by February 1, 2013.

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