I am planning to short sale a house that I bought as a primary residence but never moved into because of a job transfer. Like a dumb ass I still took possesion because I didn't want to lose my $15,000 deposit. I rented it out waiting for the market to rebound - it proceeded to decline in value by $175,000. ( I swear it is just a regular 3 bedroom house in CA.) But the rent covers only about 1/2 the mortgage+taxes+ insurance, and it is about to adjust upward aftert 5 years. After we pay 10% to the investors, the short fall amount after the sale will be somewhere around $160,000. I have done enough research to know that the lender wil hit me with a 1099 for the amount as "income". How can I offset this? There has got to be a way to avoid an $80,000 tax bill on a house I have done nothing but lose money on and subsidize for 5 years trying to do the right thing. There has got to be a way to write off the loss against the income. I am desperate and feeling extremely trapped.
The lender will give you a Form 1099 with cancellation of debt income. However you will also have a loss on sale of the rental property. This loss on sale of the rental property will offset the cancellation of debt income to the extent of the loss and hence it will offset the tax liability resulting from the Form 1099.
Let me know if you have any question.
Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.
Will that all be in the same year? Or will it be something I have to carry over like a capital loss - that I can only write off at $3000 per year?
The loss on disposition of rental property will not be treated like capital loss. It will be treated as a regular loss and will offset other income without any limitation. Let me know if you have any question. Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.
Experience: CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..