Abandonment & IRS Taxation
Abandonment of property occurs when you intend to end your ownership of property without transferring it to someone else, and you voluntarily and permanently give up custody and use of the property. The Internal Revenue Service generally doesn't treat abandonment as a sale or exchange of the property, except for property that secures debt for which you are not personally liable. However, you may have a gain or loss based on the adjusted basis of any abandoned property. The IRS taxation treatment of abandonment depends on whether the property is business or personal and whether or not the property secured a debt.
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Property Not Securing Debt
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If you have a loss from abandoning business or investment property that doesn't secure debt, you can deduct the loss as an ordinary loss. If the abandoned property goes through foreclosure or repossession, the rules in the "Foreclosure and Repossessions" section of IRS Publication 544 apply. You can deduct the loss from abandonment in the tax year the loss occurred. You cannot deduct a loss from abandoning your home or other personal property.
Recourse Debt on Personal Property
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If the abandoned property was security for a debt that you were personally liable for (called recourse debt), generally you don't have a gain or loss until after the foreclosure is completed. For example, if you abandon your home in 2011 because you cannot make the mortgage payments but your bank doesn't sell the home at a foreclosure sale until 2012, you don't have a gain or loss until 2012. Although you must report and pay taxes on any gain, you cannot deduct a loss from abandoning your home or other personal property.
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Recourse Debt on Business Property
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If you abandon business property with a debt for which you were personally liable, you also don't have gain or loss until the lender sells the property at a foreclosure sale. However, unlike personal property, any loss on business property is deductible.
Cancellation of Debt
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If the abandoned property secures recourse debt and the lender cancels the debt, you may have to report ordinary income in the amount of the canceled debt. You report this income separate from any loss you had from abandoning the property.
Property Securing Nonrecourse Debt
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Nonrecourse debt is debt for which you are not personally liable. If you abandon property that secures nonrecourse debt, the IRS treats this abandonment as a sale or exchange. Your proceeds are the amount of the nonrecourse debt. If the proceeds are more than your adjusted basis, then you have a gain. If the proceeds are less than your adjusted basis, then you have a loss. You can deduct a loss from abandonment of business or investment property, although there are some limitations described in the section "Treatment of Capital Losses" in Publication 544. You cannot deduct a loss from abandoning your home or other personal property.
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