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.
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: