Loss is TAXABLE GAIN

[dealmaker]

A couple of days ago I posted about a sloppy landlord who lost his house to foreclosure, see thread SO YOU WANT TO BE A LANDLORD. Not too many responses to what I said were his mistakes. Here's where the guy is going to AB SO TIVELY CRAP HIS PANTS. He wanted tax help about how to handle his loss, guess what, he probably has a TAXABLE GAIN.

I don't know any of his number but let's just say the following applied:

Purchase price: $100K
Original loan: $100K
Loan balance: $96K
He said that it sold for $15K less than FMV, which we don't know but in my experience most foreclosures go for OUTSTANDING LOAN BALANCE. So let's say it brought $81K at the foreclosure.

Depreciation taken over the past 10 years, $32K. I used land value of 10%, then 27.5%/year, rounded it to $32K to make the math easier.

Basis in the house is $68K at the time of the foreclosure. Let's say that the lender DOESN'T come after him for the shortage, that the PMI, or MIP, or VA makes the lender whole. The lender has still FOREGIVEN either $13K or $28 of his DEBT. Foregiven DEBT is INCOME and as such is taxable.

Or am I completely wrong?

I'm pretty darn sure I'm right. Like I said this guy is going to crap his pants.



dealmaker

[Dan Auito]

I'm under the same impression as you are Frank. This guy is going to need some depends undergarments by the time his rich uncle sam gets done telling him the facts of life cocerning this deal. Let's hope for his sake he didn't need to take the depreciation over all those years! :puke:

[dealmaker]

I don't have any idea how long he depreciated it for. I do know that he had lived in it for more than 3 years, so I thought 10 would make the math easy.

Actually I don't think you have any CHOICE in the depreciation. If it's a rental it's depreciated. Maybe one of the experts can confirm that. I sold my last rental 5 or 6 years ago and just do rehabs/flips now.

dealmaker