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Permalink Reply by Kevin Bishop on June 7, 2011 at 12:01pm

I've read IRS Publication 4681 10 or 15 times about this and I do believe if their accountant can show that they were insolvent at the time of the sale, they don't have to show it as income.

 

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Permalink Reply by Dianne Rastelli, GRI, ABR, CDRS on June 8, 2011 at 11:36am

I had an appointment with my accountant about one of my a rental I own personally that I have decided to short sale. The IRS insolvency rule would apply if you can show you are insolvent the day before the lender forgives the debt. If you are not insolvent then as an investment property, you can write off the loss, which in turn offsets some of the forgiven income. Therefore, the tax ramification should not be as bad as one might believe.

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Permalink Reply by Napua Lucas on June 8, 2011 at 1:18pm

Thank you for the information.  I thought that might be the case but I wanted someone else's opinion.

Dianne Rastelli, GRI, ABR, CDRS said:

I had an appointment with my accountant about one of my a rental I own personally that I have decided to short sale. The IRS insolvency rule would apply if you can show you are insolvent the day before the lender forgives the debt. If you are not insolvent then as an investment property, you can write off the loss, which in turn offsets some of the forgiven income. Therefore, the tax ramification should not be as bad as one might believe.

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Permalink Reply by David Dee on June 8, 2011 at 7:09pm

As long as proof of insolvency can be illustrated then most likely the pros outweigh the cons as far as shortsaling the investment property. Best thing to do in this case would be to run it by a CPA as each person's case is different. Running the particular numbers for that individual will yield a clearer picture.

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