Short sale of rental property

[Hahn1040]

I have a client who sold her rental property on a short sale.

I have read the IRS pub and I think I know how to do it, but would like to see a comprehensive example

Does anyone have a site to suggest for examples of such a sale?

I would appreciate any input

Goodness the house sold for almost as much as she had paid for it, but she had taken out so much cash in refinances (not for home improvements) that the mortgage company forgave over $125,000 in debt.

orig purchase: $94,000

sell price$90,000

on 1099-C

box 2 $125,000

box 7 $79,000

Thanks for any guidance

[jainen]

>>the mortgage company forgave over $125,000<<

They didn't forgive all that much if they got $90,000 from the sale. Why did they say the FMV was only $79,000? Track the acquisition debt to determine if the exclusion for qualified real property business is applicable. But you have to use the insolvency exclusion first, and that requires a basis adjustment increasing her capital gain. She has already reduced basis by more than $3400 per year depreciation, so she may well owe substantial tax on her refinancing binge.

[Hahn1040]

Oh I know!

She bought it for $94,000 in 2003

in 2007 she refinanced $190,000 this was the THIRD refi- each time taking more cash

IT looks like her insolvency will allow her to exclude pretty much all of the amount forgiven.

Her adjusted basis (after depre) is about $84,000

So if she has $100,000 forgiven, then it reduces her basis to zero.

the the entire amount is a gain. Correct???

I also wondered why they put FMV at $79,000 since they had a buyer at $90,000.

I would love to see an example just so I can follow through each step to see that I am on track.

Thanks