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A Short sale would be better, as a foreclsoure, would hurt your credit score, and the amount cancelled would be significantly more.
If you cannot file insolvency or file bankruptcy, your only option would be to offset the cancelled debt with losses incurred by the property.
If you make an election to exclude canceled qualified real property business debt from income, you must reduce the basis of your depreciable real property (but not below zero) by the amount of canceled qualified real property business debt excluded from income. The basis reduction is made at the beginning of 2010. However, if you dispose of your depreciable real property before the beginning of 2010, you must reduce its basis (but not below zero) immediately before the disposition. Enter the amount of the basis reduction on line 4 of Form 982.
If you sell an investment property for a loss, your loss may be deductible against your income. Investment properties are treated very similar to equity investments in this regard. You will need to fill out IRS form 4797 in order to claim your losses.
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The property isn't an investment property, unless it converts to an investment since I cannot live in it. Since the loan is non-recourse I thought foreclosure would be the only option if I wanted to avoid cancellation of debt income.
If you have never reported or converted the property to an investment property, either a short sale or foreclosure would discharge any cancellation of debt you recieve.
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
You wrote: If you have never reported or converted the property to an investment property, either a short sale or foreclosure would discharge any cancellatoin of debt you receive.
I really want to know if this is the case in my situation. The loan is a non-recourse loan, so I understand if the bank does a trustee sale then there is no cancellation of debt income. I want to try to save my credit by doing a short sale, but I am told I do not qualify for the Qualified Principal Residence exclusion because I haven't lived in the home as my Prinicpal Residence in 3 years, the home is not a rental, and I am not insolvent to the extent of the debt forgiven.
I just cancelled the short sale because I was told I do not qualify for any of the exclusions in the Mortgage Debt Forgiveness Act, can you please tell me which provision would I fall under? The cancelled amount would be about $90k.
The property could be considered your primary residence even now, I would change your license and address of your tax return to make it a primary residence, by not having any evidence that you lived their or used the property recently it would be considered an investment or second home. You could qualify and I would prepare in advance to qualify.
relevant factors in determining a taxpayer's principal residence, include, but are not limited to:
(i) The taxpayer's place of employment;(ii) The principal place of abode of the taxpayer's family members;(iii) The address listed on the taxpayer's federal and state tax returns, driver's license, automobile registration, and voter registration card;(iv) The taxpayer's mailing address for bills and correspondence;(v) The location of the taxpayer's banks; and(vi) The location of religious organizations and recreational clubs with which the taxpayer is affiliated.
The actual cost of a house, apartment building, or other rental property is not fully deductible in the year in which you pay for it. Instead, landlords get back the cost of real estate through depreciation. This involves deducting a portion of the cost of the property over several years.
The cost of repairs to rental property (provided the repairs are ordinary, necessary, and reasonable in amount) are fully deductible in the year in which they are incurred. Good examples of deductible repairs include repainting, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows.
Landlords are entitled to a tax deduction whenever they drive anywhere for their rental activity. For example, when you drive to your rental building to deal with a tenant complaint or go to the hardware store to purchase a part for a repair, you can deduct your travel expenses.