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I own a home in California that I bought as a primary residence…

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I own a home in...
I own a home in California that I bought as a primary residence but has now been rented out. Its worth approx $200K less than we paid. About to lose it in either deed in lieu or foreclosure. Loans were purchase money - nothing down, never re-fied. rented the house out for last 4 years in an attempt to save it. Pretty sure bank can't touch me but I will get 1099'd.

Assuming: $575,000 purchase price, Current fair Market value of $375,000.

4 years of depreciation approx. $60,000 (just for arguments sake)

I assume the bank will 1099 us for $200 K.

The rental looses money, even before the depreciation. $20 K/yr for a total of $80,000.

Can I escape the tax? Because its a rental, Mortgage Forgiveness Act doesn't help? Should be able to offset 1099 with depreciation and loss on the rental right?

We earn approx $200,000 per year - but have two other houses, no kids, pay max taxes, get no passive activity break. Thus losing house.

Those are the pertinant facts. Please advise
Submitted: 8 years ago.Category: Real Estate Law
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Answered in 24 minutes by:
6/16/2010
Real Estate Lawyer: BizAttorney, Lawyer replied 8 years ago
BizAttorney
BizAttorney, Lawyer
Category: Real Estate Law
Satisfied Customers: 2,273
Experience: Over 12 years of business and legal experience.
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Yes, you can minimize the 1099 tax owed with the depreciation loss of the property however you can't escape the tax. However, you can offset it with various credits or prepayments. If you haven't paid any tax at all this year, then it will be extremely difficult to get rid of the 1099 taxable income. You should talk to an accountant who can then look at your entire financial picture and work within the confines of the law.

You are correct that the forgiveness program will not apply to you and yes the bank will 1099 you for $200k. The 1099 amount will be income. Income can be offset with deductions and credits. So once you start thinking of the 1099 figure as income, then you should feel more comfortable deducting expenses as you normally do.

Good luck!
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Customer reply replied 8 years ago
Relist: Answer quality.
The answer was basically - talk to an accountant - I can't pay $38 for that. When I posted the question I think it went under Real Estate Law but I think it needs to go under Tax Law/Real Estate. Could you please direct me to a Tax Specialist, instead of a business Lawyer. Thanks.
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