Short Sale -> Investment Property

[ILLMAS]

Ok here are two fictiional scenarios, TP sold two properties via short sale (no bankruptcy):

House 1

Cost + Improvements $85,000

Less Accum Depr -25,000

Adjusted Basis 60,000

As the property was increasing in value, TP refiananced and took out equity to the tune of $280,000 over the years. TP goes through hardship and cannot pay, so the bank allows him to do a short sale, house sells for $90,000. The bank issues 1099-A for $240,000 which was the outstanding loan.

Would it be safe to say $240K was the sales price and his cost was $60K therefore have captipal gains of $180K and is now on the hook for taxes?

House 2

Cost + Improvements $380,000

Less Accum Depr -70,000

Adjusted Basis 310,000

The house is sold in a short sale for 175,000 and bank issues a 1099-A for $300,000.

Would it be safe to say there will be a loss $300K - $310K = -10K

Thanks

[Jack from Ohio]

The amount of debt cancelled is the sale price. You are correct on both examples. Example 1 IS on the hook for capital gains. Consider that he sold the rental to the bank for the amount of his debt.

Many people will want to use form 982 in these scenarios. The 1099-A is not a debt forgiveness document, only a change of ownership document.

If the financial institutions issue a 1099-C, then forgiveness on form 982 MAY be useable.

Possible 1099-C for $150,000 on house 1

Possible 1099-C for $125,000 on house 2