Date: 30 Sep 2009
I am considering short selling a rental house located in California.
I bought it for $145,000 as a private residence in 2001. Then I got married and moved into my wifeís house and we rented my house out.
Since then, I refinanced the house for a total of about $240,000 of debt with an interest-only payment. The rent doesnít cover the monthly payments. Only about $3,000 of the money received from refinancing the mortgage was used to fix up the house.
The house is now worth about $150,000 to $170,000.
If the unpaid balance of the mortgage is cancelled in a short sale, will the cancelled debt be taxable income?
Date: 19 Oct 2009
Possibly. Remember there are other ways to qualify for an exclusion of cancelled debt, including insolvency and bankruptcy. See my article on short sales and foreclosures at www.realestateinvestingtax.com/shortsale.shtml and IRS Publication 4681 at www.irs.gov.
If you donít qualify for an exclusion, the income will be taxable.
Remember to consult with a real estate attorney to be sure the debt will in fact be cancelled after the short sale.
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