J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

31.11 Abandonments

On an abandonment of business or investment real estate, you may claim an ordinary loss for the property’s adjusted basis (when abandoned) on Form 4797. However, if the abandoned property is later foreclosed or repossessed, you may realize a gain or loss under the rules for foreclosures or voluntary conveyances to creditors (31.9). For example, if an abandonment loss for mortgaged property is claimed in 2011 but in 2012 the property is foreclosed upon or repossessed by the lender, all or part of the cancelled debt will be treated as an amount realized by you on a sale in 2012. The amount realized depends on whether you were personally liable and the value of the property (31.9). If personally liable, you may also realize ordinary income from cancellation of the debt (31.9).

A loss is not deductible on the abandonment of property held for personal use. If the lender forecloses on the loan or repossesses the property, gain or loss (nondeductible loss) must be figured, and ordinary income from cancellation of debt may be realized (31.9).

Abandoning a partnership interest.

Where real estate values have sharply declined, partnerships may be holding realty subject to mortgage debt that exceeds the current value of the property. Some investors in such partnerships have claimed that they can abandon their partnership interests and claim abandonment losses. In one case, an investor in a partnership holding land in Houston, Texas, argued that he abandoned his partnership ...