Dear XXXXXXXXX,

There is a tax benefit if you are not a professional realestate person.

The tax benefit is that you will be incurring passive losses.

Passive losses can be taken against your regular income to reduce your overall taxes.

NOTE: As a matter of course, in most realestate markets, the turn over time for rental properties to gain maximum tax and profit benefits is between 7 and 10 years. This allows 7 to 10 years to recover the principle on the home and to realize any gains from market movement.

I understandt he current market is depressed but it shows signs of recovery.

With this recapped mortgagte, in my opinion, to recover the costs with tax benefits, you would need to keep the property for at least 2 more years.

Dear XXXXXXXXX,

Thanks for the additional information.

The simplist way to explain passive losses is to say that if you are actively engaged in the management of the property, as you indicate you are; and as long as you are not a professional realestate person, which it sounds like you are not; and that this is your only rental property, then any losses you derive would be considered passive losses.

you shoudl be reporting the income from rents and all expenses including: depreciation, mortgage interest, taxes, etc on schedule E. (I assume you "intend" to make a profit, because you have been).

Because of your high income, you will not, under current law, take advantage of the passive losses during current tax years; but you can carry them forward, and take them in the year of sell.

(those eviction trial expeses should be captured as legal expenses on schedule E)

so generally, this would still be a good property to keep for two years at least.

The thing you introduce that changes this, is the need for 50K in repairs. I doubt you would capitalize those in two years.

If your realestate market is depressed, you may be lucky to recover 25 to 50 percent of the repairs, if that, since you are already talking short sell. You are likely not going to be able to raise rents substantially to recover the other 25,000 or more over a 5 year period.

It is sounding more and more like you may want to walk.

If you are willing to hang on for another 3 to 5 years, where the market is showing signs of recovery sometime in the next year, and with property prices then rising at a modest 3% per year, you may still hang on. BUT, in the end you can probably get more than 3% by investing your money elsewhere, without paying 50,000 to do it. Put that 50,000 in a 3.5% CD and you are already ahead of the game.

FYI: If you have not been capturing depreciation to date, you may want to go back and do that. The IRS will assume you have, even if you have not, and you will be expected to pay recapture tax of 25% on accumulated excess depreciation.

use this calculator to estimate your tax consequences:

http://www.realestate-calc.com/Real_Estate_Tax_Calculator_I2.asp

Use different scenarios. Remember, short sales and forclosures are sales under the IRS regulations. so you can still have a capital gain, even though there is not sufficient income to pay the loan off.

Also any forgiven debt becomes taxable income, at you regular rates.

You can get some of that reduced or eliminated, but only to the extent of your personal insolvency.

So part of your consideration, is are you able to AFFORD the taxes of 25% recapture of depreciation, 15% of capital gains if any, and income tax on forgiven debt at your marignal rate, which looks to be 30%.

Dear XXXXXXXXX,

Sure. I will just throw some figure out there to give you an idea of what I am talking about.

1. the IRS requires all banking institutions to report forgiven debt on form 1099-C. IN this case, if your mortgage is short 350,000 after a foreclosure, then you would have cancellation debt income of 350,000. that is the amount of debt that was forgiven. The actual amount forgiven is normally determined after the bank sells the property after foreclosure. This 350,000 forgiven debt would be considered income and taxed at your marginal rate. Your marginal rate would be 30% at least. so this means your tax exposure, without adjusting it for insolvency would approximate 117,000 dollars.

2. Capital gains. Based on the information you provided, there would likely not be any capital gains.

3. recapture tax. this is based on depreciation. You do not indicate what you accumulated depreciation is, but lets assume your excess accumulated depreciation of the 900,000, including a devaluation adjustment to 600,000 would approximate, 300,000 dollars. (you need to figure your actual depreciation on this property and likely you will need a CPA to do it for you. This is because it looks like you can justify an adjustment downward in depreciable basis). Your recapture tax is approximately 25% of the 300,000 or: 75,000.

This means a very rough estimate of potential tax exposure as a result of foreclosure would approximate 192,000 dollars.

NOTE: marginal rates are your income tax bracket. You can view them here: http://taxes.about.com/od/2009taxes/qt/2009_tax_rates.htm