What losses can be deducted to offset a 1099-C for an investment property? - Money in the Bank | Money Maker

Sad in FL · #1 (**permalink**) 07-25-2007, 10:53 AM

I own this home since feb/06. Will I be able to deduct mortgage interest, taxes,maintenance and other expenses to any income I have to report (1099-C)? What about the downpayment I walked away from. In my case I put down 20k. My loan balance is $172K and properties in area are appraising for $172K-$177k. I purchased for $192k. I 've paid about 23K in interest only payments and other expenses in my attempt to try and sell and not ruin my credit. But I'm at the end of my rope. I would like to understand all the financial consequences of doing this "deed in lieu" beside of course ruining my credit. Thanks

Mark S · #2 (**permalink**) 07-25-2007, 08:34 PM

1099-C (Cancellation of Debt Income or COD) income is excluded to the extent you were insolvent at the time of turning the property over to your creditor.

You are insolvent when you have a negative net worth (Liabilities are higher than Assets)

http://www.irs.gov/pub/irs-pdf/p908.pdf

The above link is to Publication 908 (Bankruptcy Guide)
On page 21 it spells out under what conditions you can exclude COD and how much and what you must do afterwords.

PepsiLime · #3 (**permalink**) 07-25-2007, 08:39 PM

Was it a rental property? If so, you should have filled out a schedule E for your 2006 tax return, and you would have been able to deduct the expenses that you have listed above, in addition to others related to the property (including depreciation). By doing a "deed in lieu" (which I have unfortunately done in the past) you are basically turning the property back over to the lender in exchange for your remaining loan balance. I'm not clear as to what the downpayment you walked away from is, is it this property or another property? If you purchased it for $192K and your loan balance (interest only loan) is $172K and you put down 20K then it would seem the downpayment you are talking about walking away from would be the 20K you would lose by doing the deed in lieu of. It seems to me though that you would have a loss of around 20K on this investment property. You bought it for 192k and would be giving it back to the lender in exchange for them forgiving your debt of 172k to them. therefore you would only lose your 20k downpayment. You would have to subtract from the 20k any depreciation that you incurred on the property. Also, just to let you know a deed in lieu does affect your credit, but not as much as a foreclosure would. One other thing you could consider doing would be seeing if your lender would allow a "short sale". That would be them allowing you to sell the property for less than you owe them, and them not asking you to make up the shortage.