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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4177
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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I am a bit confused. I asked this question couple of days ago

Resolved Question:

I am a bit confused. I asked this question couple of days ago here and the same question I asked with Accountant. I got two different answers.

I have a rental property, not my primary residence. This property is going through short sale. This is the situation.

My Credit card debt 40,000
loan on primary residence: 160000 (All Acquisition debt, no equity loan)
Loan for property going through short sale: 140000 (All Acquisition debt, no equity loan)
Car loan: 20,000

Total Liability right before the mortgage loan forgiveness = 360,000

Assets
Property under short sold: 50,000
Primary residence: 160,000
Cars: 22000
Other assets cash etc = 3000
Retirement Fund= 95000
Total Assets = 240,000

Insolvent up to 120000. Do I pay taxes on this loan forgiveness? Please advise.
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

NPVAdvisor :

































AssetsLiabilities
5000040000
160000160000
22000140000
300020000
95000
'-------------------'-------------------
330000360000
Customer:

Hi

NPVAdvisor :

Iget a different total, but you're still insolvent, so will not have to pay taxes on the forgiven debt

NPVAdvisor :

If this were a primary residency, of course, you wouldn't have to show insolvency, but as you see, based on these numbers, you're there

Customer:

This is correct. I made a mistake. Your total is correct. My accountant disputes that. Can you give me a little more detail as to what to quote to him as he is the one who will be doing the taxes and need to be sure before I agree to the short sale.

NPVAdvisor :

sure, let me get the IRS documentation ... just a sec

Customer:

thanks.

NPVAdvisor :

.

NPVAdvisor :



Insolvency






Do not include a canceled debt in income to the extent that you were insolvent immediately before the cancellation. You were insolvent immediately before the cancellation to the extent that the total of all of your liabilities was more than the FMV of all of your assets immediately before the cancellation. For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets which are beyond the reach of your creditors under the law, such as your interest in a pension plan and the value of your retirement account). Liabilities include:





  • The entire amount of recourse debts,




  • The amount of nonrecourse debt that is not in excess of the FMV of the property that is security for the debt, and




  • The amount of nonrecourse debt in excess of the FMV of the property subject to the nonrecourse debt to the extent nonrecourse debt in excess of the FMV of the property subject to the debt is forgiven.







You can use the worksheet on page 6 to help calculate the extent that you were insolvent immediately before the cancellation.

NPVAdvisor :

You'll find this under "Insolvency" in the "exceptions" area on this page: http://www.irs.gov/publications/p4681/index.html#en_US_2012_publink1000192015

NPVAdvisor :

By the way, you can bookmark and come back hre as long as you need, for reference ...

NPVAdvisor :

and the link will stay active (to the IRS doc) as well

NPVAdvisor :

If this HAS given you enough information, I would appreciate either an “accept” or a feedback rating of 3 (OK) or better. That's the only way they will pay us here. HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

Customer:

Thanks a lot. One thing, if for any reason IRS comes to me saying that you do owe any tax and I do not have to money to pay, can I still file for the bankruptcy? Will IRS leave me alone then?

NPVAdvisor :

First, if your accountant sends in the worksheet and does the 982, you shouldn't have any problem

NPVAdvisor :

But, the bankruptcy will be much more cumbersome..... but WOULD, if granted, provide even more documentation of the insolvency

NPVAdvisor :

the tax issue is very common right now, and simply a matter of filing

NPVAdvisor :

Make sense?

NPVAdvisor :

Questins?

Customer:

One sec please reading it

NPVAdvisor :

sure

Customer:

So, if I file the for bankruptcy the tax which are for example due (for whatever reason) will be removed even if the bankruptcy is filed after the effect?

NPVAdvisor :

That's a different queston

NPVAdvisor :

What I was saying was that the debt forgiveness WILL NOT be taxable as long as you were truly insolvent

Customer:

Can I ask IRS before I agree to short sale? do they normally entertain question about what is covered under insolvency or not?

NPVAdvisor :

And going through the bankrup[tcy you will have much higher documentation requirements than simply completing the worksheet and filing a 982 with your return

NPVAdvisor :

It's right there in the p[uiblication I gave you

Customer:

No, I am not going to go for bankruptcy if I do not have to pay taxes on the forgive loan,

NPVAdvisor :

you're certainly welcome toask them

NPVAdvisor :

But in any conflict the IRS publication (in this case publication #4681) will always win out

NPVAdvisor :

If those numbers are good you're fine

Customer:

OK thanks for your help. You have been very patient.

NPVAdvisor :

You might want to consider having a competent person do your taxes

NPVAdvisor :

there shouldn't be any doubt there

NPVAdvisor :

NO problem

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4177
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and other Tax Specialists are ready to help you

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