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Roger, Attorney
Category: Bankruptcy Law
Satisfied Customers: 30909
Experience:  BV Rated by Martindale-Hubbell; SuperLawyer rating by Thompson-Reuters
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What are the tax consequences of short sale or forclosure

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What are the tax consequences of short sale or forclosure? For example if I purchased a rental property for $260,000 and have a current balance of $215,000, short saled it for $75,000; It is my undrestanding that I would be taxed on the difference between the amount owed and the short sale price ($215,000 - $75,000) = $140,000 at my ordinary income tax rate but I would be able to write-off my loss from the short sale ($260,000 - $75,000) = $185,000 at the capital gains tax rate. Is this correct? Are the tax consequences of a foreclosure the same as for a short sale?

Thank you,

Tom Venuti
This is true with short sales. As for a foreclosure, an important consideration is whether the debt is "recourse" or "nonrecourse". If the debt is "recourse", the debtor is personally liable for the debt. If the debt is "nonrecourse", the debt is only secured by the property, and the debtor is not personally liable for the balance.

Customer: replied 7 years ago.
What determines the debt being either recourse or non-recourse? Nevada is a "recourse" state; however, does the type of loan (recourse or non-recourse) help determine weather or not the debt is "recourse" or non-recourse"?
The loan documents indicate whether it is a recourse or non-recourse loan. However, because Nevada is a recourse state, it would be highly unlikely for the loan to take this right away from the lender.
Customer: replied 7 years ago.
Adam - One more question. I understand that the tax consequences and adverse credit consequences are the same for a foreclosure and a chapter 7 BK. If this is the case and if one is facing foreclosure, why would one not go ahead and file chapter 7 BK to free themselves from the property AND eliminate all personal debt instead of just allowing the foreclosure.


Reasons vary from person to person because of his/her particular situation. However, many people just want to let their house go but want to keep everything else.

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