capital loss: short sale (mortgage, mortgages, sales, price)

[paddlin]

Just the facts:

Bought FL home in 3/05 for $675K via a 1st and 2nd mortgage (zero down)
Gutted house with own cash then finished work with a $100K 3rd
So total mortgages equal $775K

Lost job. Put house on market. Moved out of house to allow for renters that paid roughly 1/3 of monthly note.

After 500+ days on the market, I finally closed on the property in December 2007 with a sales price of $725K plus all the related costs.

My bank approved the short sale. The 1st was paid in full. I have a total of $120K left on the 2nd and 3rd and I've continued to make monthly payments because that is just the right thing to do, and I don't want to screw up my credit.

So, I lost $120K on the transaction ($50K difference plus the crap load of closing costs). I have receipts for all the work I did which exceeds $200K over and above the mortgages.

It is my understanding that I cannot write off the loss unless I file as a rental property. Is this the case and how do I determine if the rental income added to my taxes is worth the capital loss overall? Is there a limit to the loss I could claim if I did indeed report the rental income and went that route? And does it matter that I legally have two mortgages for a house I no longer own?!

What a mess.

Any help out there is much appreciated.

[DMenscha]

Frequently Asked Questions - Keyword: Capital Loss has the answers to your questions. The time period of the property being rented is going to be the critical item for you. Probably a good quick question to ask of a CPA.