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socrateaser
socrateaser, Lawyer
Category: Tax
Satisfied Customers: 38257
Experience:  Retired (mostly)
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Im looking into short selling a RENTAL property. The sale

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I'm looking into short selling a RENTAL property. The sale price is likely to be below the loan balance and also below the purchase price. Will the loss offset the 'gain' resulting from the forgiveness of debt? my understanding is that for rental property this is allowed (unlike primary home or investment property). Please confirm.
If not, can I use carryover loss from previous years for that purpose? how is depreciation affecting the tax calculation? following your answers, I will need an estimate of my tax liability based on my actual numbers.
A short sale can generate a tax liability both as ordinary income and capital gain. The worksheet in Pub. 544, Table 1-2 (page 5) can be used to determine the tax liability, by simply replacing the term "foreclosure" with the term "short sale" wherever it appears in the worksheet.

Whether or not your loss offsets your gain, depends on the facts and circumstances as calculated by the worksheet. To the extent that the property generates passive losses in excess of $3,000, they can be carried forward. To the extent that you have passive losses from prior years, you can use them against your gain in the year of the short sale.

Hope this helps.

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Customer: replied 4 years ago.
To Socrateaser
Reading the IRS publication is confusing to me as i can't figure out what is relevant to my case. As I stated in my original question I will need help with estimating my tax liability using real numbers. Can you help? Let me know and I'll send you the numbers.
Show me the numbers, and I'll see what I can do.
Customer: replied 4 years ago.
To Socrateaser
I will do this tonight
I look forward to assisting you further.

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Customer: replied 4 years ago.
To Socrateaser
Here are the numbers:
Purchase price 2007: 421,000
Loan balance: 336,000
Expected sales price: 210,000
Carryover passive loss 2007-2011: 50,000
Depreciation 2007-2011: 76,000
According to my calculations, you have $126,000 cancellation of debt income, which must be reported on your Form 1040, Schedule E as additional rental income, and a $135,000 capital loss (Form 1040, Schedule D).

The carryover passive loss can be applied against your rental income.

Hope this helps.

NOTICE: My goal here is to entertain while educating the public about the law. I hope my answer is useful and informative to you. During our conversation, the website may ask you to rate my answer. If you rate my answer lower than the middle rating, then the website retains your entire payment, and I receive nothing. It is entirely your choice as to how you rate my answer. However, because your payment to me is in the nature of a donation/gift, rather than as compensation for any services rendered, you are entitled to know how your rating affects the final distribution of your donation.

If you need to contact me again, please put my user id at the beginning of your question ("To Socrateaser"), and the system will send me an alert. Please Click the following link for IMPORTANT LEGAL INFORMATION. Thanks and best wishes!


Edit: The phrase, "a $135,000 capital loss (Form 1040, Schedule D)" above, should read "a $135,000 ordinary loss (Form 4797)." See Stephen P. Wasnok v. Commissioner 30 T.C.M. 39 (Tax Ct. 1971).
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