The short sale tax issues for homeowners are relatively straightforward. In most cases, the Mortgage Debt Relief Act of 2007 absolves homeowners of paying taxes on forgiven debt in conjunction with a foreclosure. However, for investors with a rental property in foreclosure, the question is a little more tricky. The good news is that in a vast majority of the time, investors can declare that they are insolvent, and avoid taxes on this phantom income.
How do you know if you are insolvent? Insolvency, as defined by the IRS is when your total debts are greater than the total fair market value of all your assets. You measure your insolvency at the moment prior to the cancellation of debt.
Here is an example. You have a rental property with total debt of $300,000. You sell the property as a short sale for $200,000. As long as your assets immediately prior to the sale were less than $100,000 you can declare yourself insolvent and avoid paying tax on the forgiven debt.
How do you report this information to the IRS? U
se Form 982, Reduction of Tax Attributes Due to Discharge of
Indebtedness (and Section 1082 Basis Adjustment) and attach it to your federal income tax return. Check out the IRS website for detailed instructions. Run everything by your CPA for authoritative guidance.
Comments
Post has no comments.