If I sell investment property for less than the adjusted basis, do I owe capital gains?
August 12, 2011
Date: 14 Oct 2008
I purchased property in 2005 for $1,100,000 using about $450,000 from proceeds in a 1031 exchange as a down payment. My adjusted basis was about $650,000. The original mortgage for the property was about $500,000. After one year I refinanced for $797,000 and took $297,000 in cash. Now the fair market value of the property is about $600,000.
If I short sale or walk away, am I still responsible for the full capital gain tax? If I sell for less than the adjusted basis, am I still responsible for capital gains taxes?
Date: 5 Nov 2008
If the sale price of the property is the fair market value, which you estimated was $600,000, and given your tax basis of the property was $650,000, you will probably have a loss relating to the sale. If this was a rental property, the loss could be an ordinary Section 1231 loss.
You will have ordinary cancellation of debt income of about $797,000 - $600,000 = $197,000.
To really see how your situation will settle out, you need to consult with a tax advisor. That’s our business!
We have more answers to frequently asked real estate tax questions! We also offer up-to-date information about new tax real estate tax developments in Michael Gray, CPA's Real Estate Tax Letter.
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