During 2010 there has been a record number of foreclosures, short sales and forced sales for homeowners and real estate investors. As hard as it is to deal with the complexity of a real estate disposition, the paper work and anxiety doesn’t end there. Now comes the moment of truth, and some of the following questions arise: “How do I report the transaction on my tax return?” “Will my short sale be subject to tax?” “I lost my house do I have to pay tax ?”
The answer is not easy because the rules differ from state to state. Here in California for example (which is a community property state) personal residence disposition (foreclosure or short sale or deed in lieu) is handled differently than an investment property.
Generally speaking, a disposition of a foreclosure on a personal residence will not be subject to tax (unless you borrowed money against your property and was used for other purposes). If you used any of the debt against the property for other purposes, you may have a taxable event.
For real property used as an investment or rental, the rules get even more complicated. First you have to determine on any debt forgiven how the debt needs to be allocated between recourse and non-recourse debt. Then gain or loss is calculated on the disposition.
Come see us. We are experts in involuntary conversions, short sales and foreclosures. Call us at 619-497-1040.