Abandoned Property

When you abandon property, you voluntarily and permanently give up possession with the intent to terminate your ownership.  An abandonment represents a total loss of your investment or interest in the property.  If the property is business or investment property you may have a deductible loss.  And the loss may be an ordinary loss (as opposed to a capital loss) even if the property is a capital asset.  The amount of the loss is the adjusted basis of the property at the time of abandonment.   Abandonment of personal property, such as a home, is not a deductible loss for federal income tax purposes.

An abandonment may lead to the property subsequently being foreclosed on or repossessed.  In this case, the gain or loss would be determined according to the rules for foreclosures and repossessions.

Cancellation of Debt

If there is a debt that secures the property, such as a mortgage loan, and as a result of  abandoning the property, that debt is cancelled, the amount of the cancelled debt constitutes ordinary income to the person who was personally liable for payment of the debt.  This ordinary income for the cancellation of the debt is separate from the ordinary loss for abandonment of the property.  Pledging the underlying asset as security for the payment of the debt is not necessarily the same as being personally liable for payment of the debt.

So in the case of abandoned property, it would be possible to have both an ordinary loss, for the abandonment of the property, and ordinary income for the debt that is cancelled, if you are personally liable.

• The loss on the abandonment is for the adjusted basis in the property, which could be the purchase price or another basis, depending on how the property was acquired.  There could be adjustments to the original basis, such as increases for additions or permanent improvements, and reductions for depreciation deductions or casualty losses. 
• The income is for the cancelled balance of the debt.  This could be the balance of the original mortgage loan to purchase the property.  Or the debt could be another type of loan secured by the property that is abandoned.

How To Report Income from Cancellation of Debt

Income resulting from the cancellation of debt related to business or rental activity should be reported as business income or rental income (for example on Schedule C, Profit or Loss from Business, or Schedule E, Supplemental Income and Loss).  Income from the cancellation of a non-business, personal debt would be reported on the “Other Income” line on Form 1040.

Income from the cancellation of debt does not have to be included in taxable income if any of the following apply:

• The cancellation was intended as a gift.
• The debt is qualified farm debt.  (The debt is incurred directly in operating a farming business, and at least 50% of gross receipts for the 3 preceding tax years were from the farming business.)
• The debt is qualified real property business debt.  (The debt is incurred or assumed in connection with real property used in a trade or business, the debt is secured by the real property, and the property was purchased before January 1, 1993, or on or after that date if the proceeds were used to acquire, construct, or substantially improve real property.)
• You are insolvent or bankrupt.

If the lender is aware that you have abandoned the property that secures the debt, you should receive a Form 1099-A or 1099-C showing information you need in order to report the loss for abandonment and the income for cancellation of the debt.