Short sale impact on taxes

[tom1944]

residential real estate is depreciated over a 27.5 year schedule. That means the property less the cost of the land is taken as an expense on your Federal Schedule E. So your condo cost of $236,000 less the land value is divided by 27.5 and every year you filed your tax return that portion was subtracted from the rent you collected. So lets say you paid $236,000 and the land value was $6000/ You would depreciate $8,364 (rounding) of the building each year. So if you owned the property 5 years you would have depreciated $41,820.00 from the original cost basis. Since you paid $236,000 and depreciated $41,820 your new cost basis would be $194,180. Since you sold the condo for $216,000 you had a capital gain of $21,820 less other expenses.

[mikieguns]

Thanks everyone! I still am not 100% certain what kind of tax bill I may face though. Perhaps I am still not understanding everything. It is quite complicated! For example, look at this paragraph I found on the internet:

Losses from the sale of income-producing properties may be deductible as ordinary losses under Internal Revenue Code Section 1231. (The loss is reported on Form 4797.) The loss may offset cancellation of debt income. If the property isn’t income producing, the loss may be a capital loss, limited to capital gains plus $3,000.

Since I never actually made money on my rental (the rent did not 100% cover the mortgage plus taxes) does that mean that it is non-income producing and the loss can be deducted to offset the cancellation of debt? I hope so!

[sonofagunk]

I thought, if the sale was in 2011, then it would be tax free. That exception expired in 2012

[mikieguns]

what exception sonofagunk?

[nybbler]

Sonofagunk: the exception only applied to primary residences, not investment properties.


mikieguns: Yes, if section 1231 applies (and renting it out might be sufficient; you don't necessarily have to have made a net profit) you can deduct the whole loss in 2011. But you really need to talk to a tax accountant to see if that's allowable.

[mikieguns]

thanks Nybbler, that makes me feel better! Also, I called the IRS to try and obtain some guidance as well. The guy I spoke with agreed, and said that the entire loss on the property can be reported on form 4797 as a deduction (what I paid for it versus what I sold it for) and should help offset a good portion of the cancelled debt. I hope he is right!

[mikieguns]

I am getting my taxes done by H&R BLOCK this weekend. Last question - how do you suggest I approach this topic with them? How should I prepare for the discussion? I appreciate it!

[mikieguns]

One final question - if for some reason the above scenario does not work out for me, I can also get out of the tax if I prove I was insolvent at the time of the short sale right? I think I might be able to. Take a look:

My lliabilities (2 mortages plus car loan plus student loan) exceeds my assets (2 property values, car value, bank account balance) at the time of the short sale.

[JMS1]

We recently went through very much the same scenario. 2homes with short sells. 1: >160k underwater and the other 85k underwater. (had >30%down on both) Gratefully was able to sell them both at 90/100/days since we had all our documentation and no late pays/or liens on the properties. BUT before we ever put them on the market we went to both our attorney and our accountant to ask for help on working through the worse case scenarios in case we had to declare bankruptcy or foreclosure. It was totally worth it. Since they both sold just 1 month ago. we were able to avoid the foreclosure/bankruptcy scenario.. but have made sure to have our payroll tax withholding fairly >so that we will be able to mitigate a large portion of the anticipated tax. We just received our completed tax packet from our accountant 2/days ago. and we have had enough additional withholding to offset the expected gain, she anticipated by all but 3k. The 2nd property has a bit different scenario. Our mother lived in the property, was on the mortgage ( we purchased and put her on title and mtg) so this is considered Owner occupied and exempt from declaring the loss in the same way.. but if/when we get a 1099 next year from the lender she anticipates that we would possibly have a 23k tax due or 0.00 based upon the fact that the loan has our mother's SSN listed as the 1st mtg. holder and would owe tax based upon the 85k shortfall. Sooo.. we are doing all we can to save this year for the possibility of a fairly large tax outlay for 2012. Yes..our $1875 for our tax accountant and the $500 to our attorney was well worth it. It's best to know what you can plan for in best or worst case

Tax relief enacted for recourse mortgage on principal residence debt forgiveness (expiring soon).

Congress has passed and President Bush approved H.R. 3648, the “Mortgage Forgiveness Debt Relief Act of 2007.” The legislation is effective for discharges of indebtedness on or after January 1, 2007 and before January 1, 2010. The Federal Bailout Legislation H.R. 1424, passed on October 3, 2008, extended this relief through December 31, 2012.

[mikieguns]

thanks everyone. I am still working on my taxes with H&R block. I left the country for a few weeks and let them work on it. So far it is not looking too good. Although I can claim an ordinary loss as described above, they told me I have to reduce the depreciation taken over the years (tax bases / attributes). So after they did this calculation it shows a large gain! (like 30K). I can't believe it. So I am taxed on this capital gain. Does this make sense???