Reference no: EM133079015
Question - Brittney bought a building in 2008. The building had no rental value and she held it strictly as an investment. She paid $100,000 as a down payment and borrowed $900,000. The property appreciated significantly in value over the next few years. In 2015, she refinanced the $100,000 loan with a loan for $1,500,000 secured by the property. During the next three years, the real estate market experienced a downturn, and the property severely declined in value. The property went into foreclosure in 2018 and was repossessed by the bank and the loan was canceled. At the time of repossession, the property was worth only $600,000 and the loan outstanding was $1,500,000 and Brittney's basis was $880,000, taking into account depreciation of $120,000 properly claimed on the building. Brittney is not insolvent and is not in bankruptcy.
A. If the debt was non-recourse, what are the tax consequences to Brittney (amount/character)?
B. If the debt is recourse, what are the tax consequences to Brittney (amount/character)?
C. How would your answer to A and B change if the building had been a residential rental property and Brittany had rented it out to tenants while she owned it?
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