Something important has just occurred to me about this case. Does your claimant have tenants paying rent for the property? If so, it is important to be clear about exactly what mechanism you are applying here. As Peter D says, it appears to be fair enough to regard the debts as an incumbrance secured on the property and deduct them. What you are doing is valuing the capital asset net of those debts, and arriving at very little or nothing. But you are still in theory taking it into account as capital – it just isn’t worth a lot.
This is important because any rent income paid by tenants is disregarded when the value of the asset is taken into account – whereas if you were disregarding the capital value, the income from tenants would count as income after allowing for any mortgage payents and water rates. Like a two-door cupboard in a Tom and Jerry cartoon, if the income door is shut the capital door is open, and if the capital door is shut the income door is open. The capital side of the cupboard might not have anything in it when you open the door, but the income door still has to stay shut.
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