I purchased a home in 2004 and secondary to a divorce had it refinanced in my name and in Aug, 2006 and placed the property for rent. Since Aug 2006 to Oct 2009 the property was used exclusively for rental. I lived in it from Sept. 2004 to July, 2006.

The property was foreclosed on 10-23-09. My concerns are as follows:

1. Since the property was used exclusively as a rental for 3 years plus, will I be responsible to report the difference in the foreclosed price as regular income or will I be allowed to use it as business loss. The original price of the home was $299000. Foreclosed auction price was: $170000. Difference of $129000.

2. If the difference of $129000 is going to be taxed as regular income. How does IRS expect a payment from the tax payer? My yearly income is $55000. I can barely pay the taxes at the end of the year based on my regular income. Let alone an added $129000?

3. I read it somewhere once a property has been foreclosed the owner still has 30 days from auction date to make up for the missed payments and pay to make everything current. Is this true or is an urban legend. Because I have to pay the Federal Govt taxes on 129,000 reported personal income. I'd rather borrow and bring the loan current and do a short sale now that the tenants are out the property will revert to be personal property again.


Your response would be greatly appreciated. If you could provide reference to IRS pub citation that would be great.

Thanks in advance.
Loan was - NON-Recourse
The price of the home in 2006 when placed for rental was 325,000; and the loan was recourse.

You are missing some valuable data.

1. What was the value on the date you converted this to rental property? You can't take a loss for the time you were using this as your personal residence. Losses after that will show up on your tax return on line 14.

2. Was the loan recourse or non-recourse?
If the loan is recourse and it was foreclosed, your "sales price" for form 4797 is the lesser of the loan balance or the fair market value. If the loan value is less, the difference is a problem. The bank can pursue you for it for issue a 1099-C. If they issue a 1099-C, it's "rental income" (see irs publication 4681). In theory, if this all happens the same year, the income and loss might offset each other.

If the loan is non-recourse, your "sales" price is the loan balance.