The abandonment of property is a disposition of property. 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. Generally, abandonment is not treated as a sale or exchange of the property. If the amount you realize (if any) is more than your adjusted basis, then you have a gain. If your adjusted basis is more than the amount you realize (if any), then you have a loss.
Loss from abandonment of business or investment property is deductible as a loss. The loss may be limited, as discussed in Treatment of Capital Losses, later. A loss from an abandonment of business or investment property that is not treated as a sale or exchange is an ordinary loss, even if the property is a capital asset. This rule also applies to leasehold improvements the lessor made for the lessee that were abandoned. However, if the property is later foreclosed on or repossessed, gain or loss is figured as discussed later. The abandonment loss is deducted in the tax year in which the loss is sustained.
You cannot deduct any loss from abandonment of your home or other property held for personal use. taxmap/pubs/p544-002.htm#en_us_publink100072288
Ann abandoned her home that she bought for $200,000. At the time she abandoned the house, her mortgage balance was $185,000. She has a nondeductible loss of $200,000 (the adjusted basis). If the bank later forecloses on the loan or repossesses the house, she will have to figure her gain or loss as discussed later under Foreclosures and Repossessions.taxmap/pubs/p544-002.htm#en_us_publink100072289
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 loss realized from abandonment of the property. Individuals, report income from cancellation of a debt related to a business or rental activity as business or rental income. Report income from cancellation of a nonbusiness debt as other income on Form 1040, line 21. Partnerships, corporations, and other entities, report this income on the comparable line on your tax return.
However, income from cancellation of debt is not taxed if any of the following conditions apply.
- The cancellation is intended as a gift.
- The debt is qualified farm debt (see chapter 3 of Publication 225, Farmer's Tax Guide).
- The debt is qualified real property business debt (see chapter 5 of Publication 334, Tax Guide for Small Business).
- You are insolvent or bankrupt (see Publication 908).
- The debt is qualified principal residence indebtedness.
File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the income exclusion. For more information, see Publication 4681.
If your abandoned property 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 loss from the abandonment. However, if your debt is canceled and the lender must file Form 1099-C, the lender may 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 2009, these forms should be sent to you by February 1, 2010.