short sale house

[bstaxes]

In the last 2 days 3 of my clients have thought about short sale on their houses. I have read what was previously stated on this board and have tried to do research but it must be this head cold because nothing is making sense. It seems like 1 shoe doesn't fit all. Residential house short sale mortgage 400,000, value now 300,00 if bank accepts sale 275,000 (figures are approximate), then there is no income or capital gains????

Different client - house was their home up to a year ago (moved in with family) when they tried to sell it but the value was below the mortgage. They rented it and now are considering a short sale. Using the same figures as above would they have income? I am pretty sure that I must recap depreciation but anything else.

Boy my head is really in a fog. Hoping there is a short and simple explanation but that is not possible with the IRS. I am really looking forward to this tax season and the problems the clients will have and were told it works this way by people who are not tax professionals.

Thanks for any input.

[jainen]

>>1 shoe doesn't fit all<<

Of course not, why should it? You haven't even said if this is all acquisition debt on the principal home. You haven't said what the basis is, or how the other elements of the mortgage relief fit.

If you don't usually take an update class, this is a good year for it. Otherwise I suggest you stay away from technical references like the regs and study the simple language in the IRS Pubs. A good place to start for this topic is Pub 544 at http://www.irs.gov/pub/irs-pdf/p544.pdf.

[bstaxes]

This is the only info they had. Maybe I did not make it clear, the banks they were dealing with stated no income would be taxable. The one client's basis is basically the amount of the mortgage. They purchased the house, refi for more and used the money to redo the kitchen. Their original mortgage was interest only, so little was paid on the principal.

Yes, this year I did take an update course and this was cover but only after the fact as to where the info went on the return from the 1099 A or C.

I wish this head cold would go away. I think I will wait until next week when I can think clearer. I doubt if they will sell before the end of the year.

[jainen]

>>the banks they were dealing with stated no income would be taxable<<

Document that as your reference and treat it accordingly. The banks think these write-offs meet the requirements for excluding the debt relief from taxable income. You don't know anything to contradict that, do you? Since there isn't any capital gain either, it's simple. Don't worry that they had to rent it for a short time while trying to sell--it still counts as primary residence for this purpose.

Now, to clear up your head cold, get a bottle of Chinese pepper oil and sautee some vegetables with it. (You don't have to actually eat the vegetables for this to work--just sautee them!)

[bstaxes]

I will try that but I think I would like to eat the vegatables. Maybe just saute onions (they make my eyes water) and hopefully will drain the head (isn't much in the head now except mucous). Thanks for the link and your help.

Enjoy the holidays and have a very Merry Christmas and a healthy and properious New Year.

[jainen]

>>Maybe just saute onions (they make my eyes water)<<

That's nothing compared to Chinese pepper oil.