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Old 01-22-2012, 01:10 PM
 
316 posts, read 886,096 times
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Hi. I sold a condo investment property in the fall and unfortunately had to go the short sale route. I watched the property value fall rapidly over the past few years, and eventually it fell below my mortgage balance. Over time, I had to keep bringing down the sales price to attract an offer. I was declined a refinance and also declined a loan modification from my lender; basically because I had no financial hardship and was current on my mortgage. So short sale became my only option in order to sell.

I have heard many varying answers on this question - When it comes time to do my taxes, how much will I owe the IRS due to the short sale?

For example, one tax adviser told me that I will be taxed on the "cancelled debt" (basically the amount the lender agreed to forgive me) because this was not my principal residence. This will result in a hefty tax bill, according to my calculations. But another tax adviser told me not to worry, because the loss I took on the sale (i.e. the sale price vs my original purchase price) will offset the tax on the cancelled debt. In this case, my calculations tell me I will have little to no tax impact.

Can anyone help clarify this? It is quite confusing. These two scenarios outlined above obviously are quite the opposite from each other!

thanks!
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Old 01-22-2012, 05:47 PM
 
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It's ugly. You owe taxes on the canceled debt as ordinary income. But the loss is treated as a capital loss and only offsets capital gains, plus ordinary income up to $3000. You can carry forward the loss to future years if you can't use it all, though.

Assuming you have no capital gains, this year you'll owe tax on the balance of the loan minus the amount of the sale (the deficiency), but you'll be able to deduct the lesser of $3000 and the basis of the property minus the amount of the sale (the capital loss).


(note that I am not a tax professional and I'm certainly not your tax professional)
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Old 01-22-2012, 07:00 PM
 
Location: NJ
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Pay a few bucks for a CPA. It will be worth it.
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Old 01-23-2012, 03:02 PM
 
316 posts, read 886,096 times
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Thanks. I do not have any capital gains as I sold at a loss. I am now trying to interpret your comments here….
Assuming you have no capital gains, this year you'll owe tax on the balance of the loan minus the amount of the sale (the deficiency), but you'll be able to deduct the lesser of $3000 and the basis of the property minus the amount of the sale (the capital loss).
The balance of the loan was 236K and the sale price was 216K. After the closing costs and realtor commission, the lender accepted 204K. So the cancelled debt is about 32K. So you are saying I will pay tax on 20K, correct? (236K minus 216K). I do not understand your last comment through, about what I’ll be able to deduct……could you expand on that please?

I have also been told that there are 2 other ways to get out of the tax liability: Demonstrate insolvency (I’m not sure if I can) or Demonstrate that it is non course loan. (I’m not sure about this yet either).

The research continues! Thanks.
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Old 01-23-2012, 07:27 PM
 
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You'll have to declare as ordinary income the whole $32K ($236K - $204K). However, you incurred a capital loss of whatever the basis of the house was (usually, whatever you bought it for), minus the $216K sale price. You can only deduct $3000 of that from your ordinary income. However, you can "carry forward" that loss to future years. So you can deduct $3000 from your 2011 income, then $3000 from your 2012 income, and so on until either you've deducted the entire amount OR you've used it to offset future capital gains.

The term you're looking for is a "non recourse" loan, which would be a loan where the mortgage holder couldn't go after you, personally, for the deficiency. New Jersey is not a "non recourse" state, so this wouldn't apply.

(note again that I am not a tax professional and I'm certainly not your tax professional)
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Old 01-24-2012, 11:18 AM
 
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Thanks! This is helpful. Today someone told me that since this was an investment property and not my personal residence, I should be able to deduct the loss. Is that true?
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Old 01-24-2012, 05:50 PM
 
10,019 posts, read 17,199,716 times
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Quote:
Originally Posted by mikieguns View Post
Thanks! This is helpful. Today someone told me that since this was an investment property and not my personal residence, I should be able to deduct the loss. Is that true?
Yes, but only as a capital loss.

On the other hand, if this had been your primary residence, you wouldn't have to declare the deficiency as income, due to the Mortgage Debt Relief Act.
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Old 01-27-2012, 05:46 PM
 
316 posts, read 886,096 times
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Thanks, it is starting to make some sense, I think! Will the capital loss help offset the tax liability on the short sale? (Cancelled debt). I am worried that I will owe taxes on the 32K you speak of. This may be like $8000!
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Old 01-28-2012, 07:18 AM
 
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Remember if you depreciated the property that comes off the original cost basis.
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Old 01-28-2012, 01:49 PM
 
316 posts, read 886,096 times
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What exactly does that mean tom?
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