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Ed Johnson
Ed Johnson, Tax Preparer
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I have a real estate withholding computation of estimated gain

Customer Question

I have a real estate withholding computation of estimated gain or loss form 593-E California. the house was being rented but tenants had to be evicted. I am in a short sale escrow now. My question is for the selling expense can I use the money I used to evict the past tenants as an expense? Also what is suspended passive activity losses.
Submitted: 6 years ago.
Category: Tax
Expert:  Ed Johnson replied 6 years ago.

DearCustomer

 

Thank you for your question.

 

According to the FTB and the publication booklet with instructiosn for the 593-E, cost of selling is used to reduce the selling cost and withholding.

 

The definitions of selling expenses are:

 

Line 2 - Selling Expenses

Selling expenses include commissions, advertising fees, legal fees, and

loan charges that will be paid by the seller, such as loan placement fees

or points.

 

To the extent that the eviction incurred legal fees, can be included as the cost of selling.

 

Anyother eviction costs would have to be inlcuded as a rental expense for determining any gross profit or loss from the rental (federal form schedule E).

 

http://www.ftb.ca.gov/forms/2008/08_593bk.pdf

 

http://www.ftb.ca.gov/forms/misc/1016.pdf

 

suspended passive activity losses are those passive losses for this rental unit that you were not able to take (on federal form) as a result of phase out rules or having exceeded the maximum allowable for that year. Essentially these are carry forward losses that were not able to be taken previously and now in the year of sale can be taken.

 

http://www.nysscpa.org/cpajournal/old/11818054.htm

 

 

Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience: GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
Ed Johnson and 7 other Tax Specialists are ready to help you
Customer: replied 6 years ago.

I had to pay back months rent to keep it from going into foreclouser can I use that as expenses as well.

Expert:  Ed Johnson replied 6 years ago.

Tell me more about this, I do not get it.

 

You are the property owner correct?

 

You had a tenenat correct?

 

the tenant was to have paid rent? correct? (not bank payments)

 

The tenent paid rent to you as the owner correct? or was the tenent paying rent to a property manager, and so you paid the rent yourself to the property manager?

 

 

Customer: replied 6 years ago.

I am the owner the tenant paid to a property manager, they missed 3 months of payments so I had to pay a little over 12K to keep it from going into foreclosure. I then hired a short sale company another 1K to get the short saled done. I live in CO and the home is CA. Can I use any of this expense under the other decreases to basis?

Expert:  Ed Johnson replied 6 years ago.

You are using the term decreasing basis,

 

I like to work with the capital gains formula instead.

 

the cost of selling in IRS terms is stubracted from gain, but not basis.

 

Formula:

 

Capital gains (rental) = selling price - (orignal price, + improvements and additions, + major repairs, + HUD 1 buyer costs at time of purchase not deducted elsewhere, - accumulatd depreciation) - cost of selling.

 

all the things in the parenthesis are the adjustements to basis

 

So major repairs are repairs that are made that are intended to last one year or more.

 

Cost of selling is the realtor fees, transportation, phone calls, advertising, legal fees such as the eviction legal fees, etc.

 

So the 1K to retain the short sale agent/company is a cost of selling that is used to reduce taxable gain, if any.

 

The 12K to the management company, that is another story.

 

That 12 K will be a rental expense on schedule E.

 

Here is why:

 

1. The renter was to have paid 12K for rents, but he was in default. So you paid them for him. So

 

+ the rents of 12 K can not be a rebate of rent, because the tenant did not pay the rent to be rebated in the first place. You could assume he paid 12K and you rebated the 12K but that would be a wash, claiming 12 K of rents you did not recieve, and then rebating them. not the correct thing to do and would raise a red flag.

 

+ these are essentially forgiven debt and shoudl be reported to the IRS and the tenant on form 1099-C. BUT you had this in the hands of the management company, and they may not agree.

 

+ a third option on the 12 K is to treat it as a gift, but then that would not be right either, because you then could not treat it as a rental expense; and you did not give the money to him, or really pay the gift to anyonen but yourself. (you are the beneficial owner of the property)

 

You forgave the tenent the 12K in rents, and paid them yourself to the managment company (I assume) for the purposes of providing sufficient revenue to pay the mortgage payments to avoid a forclosure. This becomes a rental expense in the form of forgiven debt.

 

This is where it gets sticky. The problem is that if the money paid to the management company was to make the bank payments on your own property, then you can not take this as a rental expense at all. It represents your bank payments. The only portion of bank payments on property you own that are deductable expenses are the interest, fees, taxes and insurance.

 

You capture the principle by depreciating the property.

 

The botXXXXX XXXXXne is that you report 12K less rents than you would have and you paid 12K in bank payments for which you subsidzed the renter. The renter should get a 1099-C for the 12K. so you will definately most likely have a loss to carry over to the next year.

 

Use this calcultor to see hat the outcome of this sell will be to you:

 

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

 

 

 

 

 

 

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Ed Johnson
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