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Taxes and Net Operating Loss

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    Taxes and Net Operating Loss

    Background: I bought some Florida rental apartments for $320K in 2004 and defaulted on the mortgage almost 2 years ago. The bank appraised them at $57K (sic!!!) and bank is suing for deficiency judgment. I am contesting their appraisal value and the hearing is set for late April.

    Ultimately I believe Chapter 7 is inevitable as I am also $25K behind on my house mortgage on which I originally owed $123K approx including a HELOC (mortgage $80K, HELOC $43K, arrears $25K.) Current value of house is about $40K. It is a 1920s wooden house and prices are in the toilet here.

    (I know the prices sound nuts, but this is Florida.)

    Question: The loss of the rental properties produced a substantial Net Operating Loss for tax purposes. I had a CPA do my tax return to be sure to get it right.

    I received a check from IRS for $10,200 which was refund of witholding in 2010 and have a further $85K carried forward for future use.

    I have not cashed the IRS check yet in case I have to repay it.

    If the bank gets its deficiency judgment for $123K and I then file for Chapter 7, will I be liable to repay the $10,200 tax refund I received to the IRS? Presumably not, if bankrupt, so I might as well spend it on lawyer fees before I file BK. But then what happens to the remaining tax credit for $85K. Will that be washed away in the BK, or will it remain when I emerge from BK (I think not)?

    Assuming that I give up the house I am living in during the BK, will I still have any tax liability after BK regarding the house or the deficiency judgment?

    The thing is, I COULD use the IRS check for $10K plus some other cash I have in a brokerage account to pay the bank off, say $15K, but will this just get me into more tax liability if they issue me a 1099 for $123K - $15K?

    I have recently retired from my job and basically all the money I have is in retirement accounts except for this $15K.

    If the bank gets the deficiency judgment (which I think will be the outcome) I may just go overseas for 3 months and spend this money, then come back and file for BK and get everything cleared away.

    My accountant and lawyer are not terribly helpful in addressing these questions. Basically they think I should just file for BK now and thank the lord for small mercies, but I just want to get the best possible outcome.

    I would welcome any comments as I don't have any experience of bankruptcy. I have no credit card debt or car payments. Just a potential deficiency judgment, a mortgage and a HELOC on a house that is deeply underwater.

    #2
    Clarification:

    Strange though it may seem, the sums for the deficiency judgement and the amount owed on mortgages on my house are both $123K. This is coincidental, but not a mistake.

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