Investor · San Diego, CA · Member since 2011 · 45 posts · 0 votes
I consider myself a real estate professional, I put well over 750 hours per year buying, selling, maintaining and managing my own real estate as well as real estate for others.
That being said, does a real estate loss affect me differently than other tax payers? I believe there is a distinction (I'm viewed by the IRS as a "real estate professional")
I think I may short sell an investment property I own in CA and expect to sell it for 60K-70K less than what I owe. I expect the lender to issue me a 1099 for the loss since it is not my primary residence and lender recourse on the loan.
But…
The same home was purchased for 204K and 30K was put into it so the loss sustained by me on the investment property will be around 135K. (adjusted for deprecation write offs taken over the last 3 years)
My question is regarding how the taxes will be handled if this were to occur, would I be able to offset the 1099 short sale loss received from the lender by the real estate investment loss?
I would talk to a CPA very familiar with real estate transactions. As a RE professional you are going to want to elect to treat all of your rental property as a single activity. Your income is treated essentially as active rather than passive.
You should be able to offset any income earned from the short sale against losses from your other RE.
I am not a tax expert at all Others may chime in. Generally you would PAY taxes on the 60K loan writeoff PLUS any depreciation taken in past years. So would/could be 90-120K of income to pay taxes on and probably at ordinary income rate. NO loss on your part to offset with. Sometimes people cant afford to short sell.
Not sure if the real estate professional designation affects this or not. But be aware the 750 hours is only the first hurdle. You must spend more hours on real estate than anything else. If you have a full time job, the hurdle becomes 2081 hours, not 750.
I'm not an expert on this, either. There are two separate items here. One is the loss on the property. That's your net selling price (selling price, less selling costs) minus your basis. Your basis is the price you paid, plus purchase costs plus improvements less all depreciation taken or allowed.
Usually you're only allowed to take a small portion, $3000 per year, of a capital loss:
http://www.irs.gov/taxtopics/tc409.html
So, you should be able to offset $3000 of the forgiven debt with the capital loss. And you'll have another $132K of carry forward losses that can be taken $3000 per yes.
Pretty sure you will not have to pay tax on the deprecation, since you have no gain on the sale.
thank you Jon.
I'm a RE broker and RE takes up 100% of my time, whether its my personal deals or deals for others. I also prop manage 4 of my own homes so the hours add up. I'll get with a CPA for sure.
Brian
I would talk to a CPA very familiar with real estate transactions. As a RE professional you are going to want to elect to treat all of your rental property as a single activity. Your income is treated essentially as active rather than passive.
You should be able to offset any income earned from the short sale against losses from your other RE.
HI Brian, Yes, you will be able to offset the cancellation of debt income with the real estate investment loss since this is an investment property. Please email me if you would like to get a report that fully covers this but a quick and dirty calculation here.
Purchase price and closing costs of $234k less sales price minus closing costs (????) = Loss on sale of investment.
Cancellation of debt income $60-70k. As long as the loss on sale of investment exceeds the cancellation of debt/depreciation recapture, then the net result on your taxes will actually reduce your adjusted gross income.
General rule of thumb is that you usually will not have a taxable event after all is said and done if your loss on the investment exceeds your cancellation of debt and depreciation recapture. I hope this helps
HI Brian, Yes, you will be able to offset the cancellation of debt income with the real estate investment loss since this is an investment property. Please email me if you would like to get a report that fully covers this but a quick and dirty calculation here.
Purchase price and closing costs of $234k less sales price minus closing costs (????) = Loss on sale of investment.
Cancellation of debt income $60-70k. As long as the loss on sale of investment exceeds the cancellation of debt/depreciation recapture, then the net result on your taxes will actually reduce your adjusted gross income.
General rule of thumb is that you usually will not have a taxable event after all is said and done if your loss on the investment exceeds your cancellation of debt and depreciation recapture. I hope this helps
Wealth Building CPA
I know this is an old post, but I have the exact same question now that Brian had. However, I would like a bit of a clarification. For years I have filed my taxes as a Real Estate Professioal, electing to treat all my real estate activities as a single actiivity. Does that have any bearing on my ability to offset my cancellation of debt income with my capital losses, as Brian had asked? I am wondering if I have somehow changed the character of passive incme and passive losses to active income and/or active losses, or some combination thereof..... thereby precluding the ability to offset each other. Does the real estate professional election have any affect here?? If you can help with that answer, it would be appreciated. Thanks!
Sorry to keep bringing up the old post on this, but it has been very helpful for me. I have another follow up question:
How is the amount of Cancellation of Debt determined in a foreclosure. Let say I have a capital basis of $100K in an investment property and a $200K mortgage/loan on it, that is foreclosed.
Is the "forgiven amount", the full $200K? Clearly the propery foreclosed upon has a value greater than $0...so is the Cancelled Debt equal to the full $200, and if not how is it determined? If the COD is only $100K, I have no tax due...Biig difference in owing ordinary income tax on $100K vs $0.
Assuming that the cancellation of debt is a different calculation than for an actual deficiency judgement...I believe the cancelation of debt amount is simply the difference between what you owed including lender's costs, and what the lender nets from the eventual disposition. Your purchase price or basis would be irrelevant...as to amount of forgiven debt. I could certainly be wrong.
Well I think my investment in the property is relevant to calculate my capital loss, which will offset the COD.
However, you bring up a point that I may be missing in regard to calculating the COD. Will I have to ultimately determine what the lender recovered after the foreclosure of my property? Is that easily assertained?
This is purely opinion, and I probably shouldn't even venture an opinion on this...
but first, you are assuming the lender will forgive the deficiency, as opposed to pursuing you for it. But, assuming they do forgive it, the 1099C issued will be their calculation of the forgiven debt. If you dispute that amount, I assume there is vehicle for that. It still makes no sense to me that you could get a "capital loss' based on the sales price being lower than your basis, since a large portion/all of that was "forgiven debt", and not a "loss" out of pocket, that you didn't have to pay. But, there are CPA's above that say this is true, so I'll defer.