Tax impact of walking away from rental property

[kumar10]

What is the name of your state (only U.S. law)? California

I have a rental property that I have been able to drag along for about 5 years now. The property was purchased at about 440K with 90K down. I still owe the bank about 350K. Over the 5 years including depreciation and other costs, I have carried over passive losses of about 60K.

After a lot of deliberation I am planning to walk away from the property. I realize all the negative impact on my credit etc. But I am still unclear on the tax impact from either a short sale or a foreclosure. I have read some places that I would receive a 1099 for the amount I owe and that would be considered taxable in the state of California. I don't want to end up paying another 30-40K in taxes when I have only passive activity losses. Some folks have mentioned that this would be treated similar to a stock loss.

Can someone please help clarify.

Regards & Thanks.

 

[wrongsometimes]

What is the name of your state (only U.S. law)? California

I have a rental property that I have been able to drag along for about 5 years now. The property was purchased at about 440K with 90K down. I still owe the bank about 350K. Over the 5 years including depreciation and other costs, I have carried over passive losses of about 60K.

After a lot of deliberation I am planning to walk away from the property. I realize all the negative impact on my credit etc. But I am still unclear on the tax impact from either a short sale or a foreclosure. I have read some places that I would receive a 1099 for the amount I owe and that would be considered taxable in the state of California. I don't want to end up paying another 30-40K in taxes when I have only passive activity losses. Some folks have mentioned that this would be treated similar to a stock loss.

Can someone please help clarify.

Regards & Thanks.

well if it is like a stock loss, you can only get 3K loss on your 1040 ... thats the max. a loss for your fed taxes. make a million & they'll tax you for a million; lose a mil & you get the 3K off ... nice system huh?

 

[fmccarthy]

You will receive a 1099 for the "Forgiven debt" - the difference between what you owe and what the bank realizes from the foreclosure sale. This amount is treated by the IRS as ordinary income. For primary homes this can be waived but as you state this was a rental that does not apply. So, if they sell it for $200,000 at foreclosure - probably less - and you\ owe $350,000 - the income is $150,000. Yes, you can offset losses to a certain extent - check the appropriate section on the IRS website for the worksheet to calculate.

Sad but happening to many people right now.