Short Sale on Rental Real Estate

If there is a short sale on rental real estate, is the taxpayer advantage taxable? Example mortgage for $300k FMV $250k, does this produce income of $50k? What if the taxpayer has $0 net worth?

Reply to
Luka
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Depends on a couple of things. First is it a recourse loan or a non- recourse loan? If it's a non-recourse loan the borrower has not received a tax advantage because there was no forgiveness of a debt he was necessarily required to pay.

Even if he would ordinarily be required to recognize taxable income, he is still not required to recognize income if he is insolvent after the sale. Having zero net worth isn't the same as insolvent.

There are different tests for insolvency. One test is whether he is able to pay his ongoing expenses as they occur. If he can do that, he is likely not insolvent.

The other test for insolvency is that debt exceeds net worth. This test may not help, though, if the taxpayer can meet his expenses as they occur.

Reply to
Stuart A. Bronstein

"Luka" wrote

It's rental property. So there has been depreciation taken on the basis of the higher purchase price. There will be a basis adjustment, a depreciation adjustment, and a resulting gain or loss on the sale, based on the adjusted "price" of the property. You probably need to run the return this transaction is reported on through a CPA or EA who can get the numbers right.

Reply to
paulthomascpa

I'd agree with my esteemed colleague, Paul, AND I'd like to add that if the forgiveness of income isn't taxable due to insolvency or bankruptcy the taxpayer may have to adjust his basis in his other assets.

It also gets tricky for reporting because of how and where the forgiveness gets reported - remember its related to a trade or business so it has to be dealt with at that level, not just as a personal issue. Though for a personally owned rental it may not matter in the end.

Gene E. Utterback, EA, RFC, ABA

Reply to
Gene E. Utterback, EA, RFC, AB

"Gene E. Utterback, EA, RFC, ABA" wrote

"Esteemed"?? You're not fixing to hit me up for a loan or something, are you?

Reply to
paulthomascpa

I thought it meant he thought you were angry, and read it as "uh, steemed."

Reply to
Stuart A. Bronstein

Steamed.

It's what voters in Mass were last week.....or is that too political to say?

Reply to
paulthomascpa

Well, since there was apparently a large "tea party" element involved, it's marginally on topic.

Reply to
Stuart A. Bronstein

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