On schedule what would be the best way to report loss of rental property outside of the client's resident state due to a lien by HOA?
Generally, a lien doesn't constitute a loss of the underlying property. The taxpayer still owns it, they just have to clear the lien before they can sell it.
Yes. However, the client loses the property because he wasn't aware of the lien and hence, the court made HOA the winner and that's how he lost the property.
You treat it as a sale, and fill out the asset worksheet. See this link for more info.