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DH and I want to do a short-sale for our rental property which is way upside down. Please spare me the lecture. I know that we will be taxed on the difference...unless we prove insolvency. The make-or-brake insolvency factor for us is our TSP (federal version of 401K). With the TSP, you can borrow money from your account at a low interest rate and you must pay it back within 5 years. Right after the short-sale, we actually want to withdraw it all in order to adopt. Please spare me the lecture unless you have spent tens of thousands of dollars and years trying to start a family all to no avail. We are going to have full federal pensions anyway so we can weather 5 years of no growth for our TSP.
By the time the IRS gets to our case, we will have withdrawn our TSP savings. TSP loans are not even reported to credit agencies because it is you borrowing your own money. 1) So, when determining insolvency, will this money, now in the form of a "loan", be considered an asset or a liability? 2) Are there any other legal repurcussions I should be aware of?
I think I know the answer to the question. I just read that, in the case of divorce, the loan is added to the account balance and is treated as an asset. Darn. Well I guess the adoption tax credit would off-set the "gain" from the short-sale. After we get rid of this dreaded property, we will be in a good position to provide for a child.
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