If I foreclose on my rental home and the property is underwater what are the tax consequences?
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If I foreclose on my rental home and the property is underwater what are the tax consequences?
I understand the Mortgage Debt Relief act only covers primary residence in a foreclosure in regards to cancelled debt, but what about rental homes? Bought rental for 300K, now it is worth 155K. Not interested in keeping it as a rental as it does not cover mortgage. I’d like to walk away. If it forecloses, am I going to get taxed by IRS for the 145K remainder of loan for this rental property? I’d like to avoid declaring bankruptcy and choose foreclosure if possible.
Asked on December 6, 2011 under Real Estate Law, California
Answers:
FreeAdvice Contributing Attorney / FreeAdvice Contributing Attorney
Answered 12 years ago | Contributor
Good question. If the home that you are writing about is foreclosed upon and it sells for less than what is owed on the loan presently, there are potential tax consequences as the result that could result in tax issues due to foregiveness of debt issues on the loan.
Given this possibility, I suggest that you get an appraisal of the property by a licensed appraiser to establish the rental's fair market value and then consult with a tax attorney as to the possible tax consequences in the event of a foreclosure on this property that you have written about.
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