Real Estate Short Sale Implications

The subject of a 1099-C (cancelation of debt income) has been well covered in various posts. Given the taxpayer is insolvent, this income can be forgiven. There's also the Mortgage Forgiveness Debt Relief Act option for primary residences that is available.

I have a client who short sold rental properties. The client is insovlent and was told by his attorney that he won't have to worry about taxes. In reviewing his documents, I told the client that he still has to report capital gains on the sale of the property as well as recapturing depreciation that he has taken over the years. This will result in a tax liability.

Now the client is upset and thinks I'm doing something wrong. Am I missing something?

Reply to
Norm
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Only up to the extent of insolvency, and with a corresponding reduction in tax attributes. It's not a binary condition.

At the federal level, yes, for acquisition debt on the primary residence. Your state mileage may vary.

Probably not.

-Mark Bole

Reply to
Mark Bole

If the level of debt relief is sufficient to make the client solvent, if the client has other business or rental assets, you may you may be able to to reduce depreciable basis in other properties in lieu of recognizing taxable income.

Reply to
San Diego CPA

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