short sale 1099-c clarification?

Question

Hello, I own a rental home in Arizona, purchased at the start of

2006. In 2006 and 2007 the combined carry over losses (form 8582) were approx 11k+11k = $22,285, I estimate 2008 carry over to be around $11k, bringing the total carry over loss for the past three years to be ~$33k. The rest of the losses have been taken each year on my income taxes. As you can see I have been quite negative on cash flow.

We have depreciated the property on average 7,600 / yr x 3 years $22,800 in depreciation taken

I bought the home for $241,500, I owe $217,400 on the loan.

I may stop making loan payments starting next month, meaning the amount owed may go from $217 to $225 or so depending on how how it takes to either short sell or foreclose. There's also the realtor fee which will most likely be part of the forgiven debt - around $9,000.

The current fair market value is probably around $150,000 (ouch). If I do a short sale or foreclosure, what is going to be the tax liability for the 1099-C forgiven debt based on all the above figures factored in? Or I should say, what will be my NET tax liability / reportable income after taking into consideration the carry over losses / adjusted cost basis above? I have heard that the 1099-C amount can be negotiated based on promissory notes, etc but lets just assume none of that occurs.

and... I know the credit ramifications are different, but are the tax ramification different for a foreclosure vs short sale?

thanks so much for the help

-Tim, San Diego

removeps-groups · Accepted Answer

No one else answered, so let me say something to get things rolling. I don't have much experience in this matter though. If the house sells for 150k, the forgiven debt would be 225-150uk, so that would be taxable to you. However, if you are in bankruptcy at the time of the 1099-C, then this 75k is not taxable. If you are in partial bankruptcy, then part of the 75k is taxable. I don't know how you determine "partial bankruptcy", though it seems if you had 5k in your savings, then only 5k is taxable. The recent mortgage debt forgiveness law allows the forgiven debt to not be taxable, if if you are not in bankruptcy proceedings, and it seems the full 75k would be tax free. I read somewhere that the forgiven amount reduces your cost basis in the house, but if you don't own the house, what does it matter? Check out this link:

formatting link

9414,00.html

I don't think there is any.

way222 · Answer

My understanding is that forgiven mortgage debt is only non-taxable on your primary residence. For investment properties, forgiven debt is taxable.

I believe AZ is a non-recourse state, so I don't believe the bank will be able to come after you for the balance. But you need to make sure. If your loan is recourse, you need to make sure the bank issues you a

1099-C or you negotiate an estoppel action up front. Otherwise, you might be in for a nasty surprise 3-4 years down the road when the bank comes looking for their money.

The forgiven debt can be non-taxable if you are in bankruptcy or are insolvent at the time of the debt forgiveness. From what I know, being "insolvent" is not clearly defined by the IRS, but it is basically if your debts exceed your assets.

You probably should get legal advice for this.

And beware of companies promising to help you with a short sale or mortgage workout, many of those are ripoffs.

tfprusd · Answer

thanks for the advice everyone.

short sale 1099-c clarification?

Join the Discussion

Didn't find your answer?