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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28908
Experience:  Taxes, Immigration, Labor Relations
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I am short selling a rental property that was a primary

Customer Question

I am short selling a rental property that was a primary residence (rental for 4 now). Loan is 224,000 and hopefully selling for between 80,000-100,000. 36,000 in depreciation. Do I have to add the depreciation to the debt forgiveness before calculating for insolvency?
Thank you,
Submitted: 10 months ago.
Category: Tax
Expert:  Lev replied 10 months ago.
For calculating insolvency - there are two parts - assets and debts.In the asset part - you add the fair market value of the property - as the property will be sold - you need to use its selling price as the FMV.In the debt part - you need to add the total loan outstanding.You do not need to account for depreciation on the insolvency worksheet.But when you will report the sale transaction - you will use accumulated depreciation to determine the adjusted basis.
Customer: replied 10 months ago.
how does adjusted basis work on a short sale?
Expert:  Lev replied 10 months ago.
The adjusted basis is determined the SAME way - regardless how the property is sold.There will be two basis - depending if you have a loss or a gain on disposition.Your basis starts with your purchase price - then adjusted (+) by improvement expenses and (-) depreciation for the time the property was rented.Use that basis to calculate the gain.If you have loss - start with the basis you used for depreciation - that is the LESSER of (1) your basis and (2) the FMV at the time the property was converted from personal to rental. Then you add improvement and subtract depreciation.In additional - if you are eligible to exclude all or a part of the forgiven debt - the basis is reduced by excluded amount - but not below zero.Let me know if you need help with calculations.
Expert:  Lev replied 10 months ago.
There are two ways to handle the forgiven debt related to rental property.1. as that is related to rental activity - you may simply report that amount as your rental income on schedule E2. as that debt is related to the qualified rental real estate - you may exclude that amount from taxable income - using form 982, but at the same time - you need to reduce the basis of your property by forgiven amount (but not below zero).In any case - you will need to report the disposition of the property as (sale price) MINUS (adjusted basis) - that will be your gain or loss depending on circumstances..You may also use insolvency exemption on form 982 - but that will provide the same result.When you prepare your Insolvency Worksheet - you need to determine if you were insolvent.The worksheet may be found on page 8 in this publication - list all your assets and all liabilities - on the day before the loan was forgiven - so include that loan into the worksheet.This worksheet is not sent with your tax return - just keep it for your record.Do not send any supporting documents and do not send that Insolvency Worksheet - to the IRS - just keep for your record.On that Insolvency Worksheet - you do not list your income - but you list the value of assets..If you are insolvent - the amount of exclusion is reported on 982 line 2 and is NOT reported as taxable on 1040. That exclusion is claimed on form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness and that form 982 should be included into her tax return.- check the box 1(b) and list excluded amount on line 2Here is the form