Good question! I know just enough to be dangerous about this stuff.
On one side, I would say no. They can't sell what is not theirs, so that they first exercise their option to repossess, giving them title to sell the goods. Generally, any tax liability or benefit would fall on the lender for any gain or loss in the sale, relative to the amount outstanding on any loan. $$ they get in excess of the loan amount are taxable income. Anything less can be deducted as a loss.
But that's where I start to get fuzzy.
1) I don't know whether the cost basis for any gain or loss in the sale takes into consideration any depreciation that the debtor might have claimed, or merely the lender's investment.
2) Real property and equipment are treated differently in the tax code, even though both ofen involve loans. If the bank agrees to a short sale (NOT part of a foreclosure) of a piece of real estate, the difference between what was owed and what the property sold for is considered to be a forgiveness of a loan, and that amount is taxable to the borrower. (Idea being that the bank deducts the loss, the borrower pays tax on the forbearance/forgiveness.) In a foreclosure, which is akin to repossession of equipment and not a forgiveness of some part of the loan, I don't know if the borrower is off the hook or not. My suspicion is that they are. The bank is obliged to pay some part (after costs of the sale) of anything they get in excess of the amount of the debt back to the borrower, and that is taxable as a capital gain only if the sale price exceeds the original purchase price.
I've probably only complicated things and my head is starting to hurt, so I'll stop now.
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Today's Featured Article - Listening to Your Tractor - by Curtis Von Fange. Years ago there was a TV show about a talking car. Unless you are from another planet, physically or otherwise, I don’t think our internal combustion buddies will talk and tell us their problems. But, on the other hand, there is a secret language that our mechanical companions readily do speak. It is an interesting form of communication that involves all the senses of the listener. In this series we are going to investigate and learn the basic rudimentary skills of understanding this lingo.
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