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I have a real estate tax question regarding a short sale of…

Hello, I have a...

Hello, I have a real estate tax question regarding a short sale of a rental property in Philadelphia, PA. I bought the 2 unit house for 109,900 and I would like to short sell for to the bank after fees for 73,000. I still owe 85,600 in mortgage.

Accountant's Assistant: Because real estate law varies from place to place, can you tell me what state this is in?

PA

Accountant's Assistant: Has anything been filed or reported?

Not yet

Accountant's Assistant: Anything else you want the lawyer to know before I connect you?

Since I made no money on the property this year and I'm selling at a loss, will I have to pay tax on the 12K difference?

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Customer reply replied 6 months ago
When filing previous taxes I have been filing my property as a depreciated property. I bought it in 2006.
Customer reply replied 6 months ago
I already authorized my broker to request the short sale from the bank.
Answered in 45 minutes by:
8/3/2017
Mark Taylor
Mark Taylor, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2,395
Experience: Certified Public Accountant
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Hi my name is Mark. I will be happy to help you with your questions. With a short sale of a rental property you will have both cancellation of debt income and a loss on the sale. It looks like the loss may exceed the cancellation of debt income but I would need some additional information to make this determination. You mentioned that you purchased the property for $109,900. How much accumulated depreciation di you claim on the property?

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Customer reply replied 6 months ago
I'm looking at my 2016 tax papers now. I did receive a letter from PA showing an accumulation of years.
Customer reply replied 6 months ago
Last years MACRS Depreciation was $3907

How long have you owned the property?

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Customer reply replied 6 months ago
I have a Business Privilege License with PA and every year I pay BIRT and Net Profit Taxes. Through Housing Inspection I pay annually $50 per unit to rent the apartments. So the house is definitely an official renting property.

When did you buy the property?

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Customer reply replied 6 months ago
April 2006. Just before the bubble bust. Originally, my mortgage company was Countrywide, but when they fell Bank of America bought my mortgage. I refinanced once, to get out of an all interest loan.

Assuming that your depreciation is $3,900 a year you would have approximately 42,900 of accumulated depreciation. Your adjusted basis would be $67,000. So for the short sale the sales price would be $73,000. You would have again of $6,000. Do you know if the loan is recourse or non-recourse (mortgage)?

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Customer reply replied 6 months ago
I did receive a Business Income and Receipts Tax Notice from PA on 10/29/16 . I don't know if it would effect my taxes though. It says:
2015 Loss Available $51,716.00 for the years 2012 20,980.00-
2013 5,736.00-
2014 25,000.00-
Then it says "Loss Carry Forward as calculated" $51,716.00No, I don't know about recourse. Would it be on my mortgage statement? How can I found out?
Customer reply replied 6 months ago
I pay PMI
Customer reply replied 6 months ago
In 9 months I won't have to pay PMI anymore because I would have paid 20%.
Customer reply replied 6 months ago
I read this article, which I don't fully understand; but it seemed as though it was in my favor.
"....a short sale will qualify for the exclusion under Section 108(a)(1)(D).
"Regs. Sec. 1.167(g)-1 makes clear that the basis reduction does not apply to property held for the production of income that is converted to business use."
Would any of that help me?I forgot to say, Thank You So Much for helping me!!!

The suspended losses (loss carry forwards) will help a lot. These will be released when you sell the property.

So you have a gain of $6,000 on the sale. Cancellation of debt income of $12,600 (if recourse financing).

You would be able to claim the $51,716 loss. So you would have a net decrease in taxable income of approximately $33,000.

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Customer reply replied 6 months ago
That's good news. Thank you so much. I was so nervous that I would have to pay taxes. I hope the bank approves the Short Sale. We'll see.Thank you again.

It is possible that you may qualify for relief under IRC Section 108(a)(1)(D). It depends if the rental is considered a trade or business.

Here is a very good article that discusses the different aspects of the treatment.

http://www.fogelcpa.com/documents/fogelrentalforeclcsea.pdf

It was my pleasure. If you would take a moment to rate my response I would greatly appreciate it. This is the only way that I will receive credit for helping you today. There should be stars located above the question. If you have additional questions or need clarification I would be happy to continue the discussion. Thank you.

Mark Taylor
Mark Taylor, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2,395
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Customer reply replied 6 months ago
No Problem At All.
Thank you for you excellent help.
Customer reply replied 6 months ago
One more thing. How do I find out if I have recourse financing?

When you receive a 1099C box five would be check if it was a recourse loan. In most cases it is a recourse loan.

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