Today TaxMama® hears from GADS in the TaxQuips Forum, with this issue that I probably should not make public: “A 2 family house has been rented for the last 5 years. Both units are rented. The owner stopped paying the mortgage 18 months ago. He still is collecting rents and reporting them on Schedule E. Since he has not paid any property taxes or mortgage interest those items cannot be deducted. The bank is starting foreclosure proceedings. The question is: Can he still take depreciation?”
Dear GADS,
What a genius.
Or a jerk.
Yes, he must report all the income.
He may only claim expenses that he has actually paid.
Yes, he may claim the depreciation.
And…when the bank forecloses and reports the balance of the debt that has been cancelled, they will include the amount of the accrued interest in that balance.
So when you report the cancellation of debt, you will also get to deduct the interest that they have not paid, and probably also the property tax that the bank paid to protect their interest in the property – and added to the balance of the loan.
See…pure genius.
And remember, you can find answers to all kinds of questions about fiscal irresponsibility and other tax and business issues, free. Where? Where else? At www.TaxMama.com.
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