Short Sale of Rental Property

[Meg Hoff]

I am considering a "strategic default" of my condo property in California. I bought it as my primary residence in 2004, but have rented it out for the past two years. I am more than $100K underwater, and do not qualify for refinance, loan mod, HARP, etc. I am wondering about the tax consequences, since it's considered an investment property, will it be treated as a loss? I can't use the Mortgage Debt Relief since it's not my primary residence. I am going to try and short sell it in the next few months.

[Jon Holdman]

Either a short sale or a foreclose may result in taxes on the "phantom income" produced by the forgiven debt. I believe California is a non-recourse state, so they can't come after you for the shortage. But expect to see a 1099 for the forgiven debt.

If you do short sell it at a loss, that would produce a capital loss. That may be usable to offset other capital gains, but the amount is limited each year.

I'd strongly advise a conversation with your CPA to be sure you understand exactly what may happen.