Tax Consequences for a Foreclosure on an Investment Property

[jerry10]

Hi, great forum, I have tried searching through the archives for an answer to this, but I didnt really find an exact answer....

I own a rental property that I am thinking about letting it go back to the bank. As I did my research, I found out I might get 1099'd for the forgiven debt. I am wondering if I can qualify for anything the IRS might offer..

I am currenty renting an apartment that I live in, I do not own any other property. The rental property has 2 mortgages, the first one is about 200k, the second is about 50k. The value on the place is now about 185k.

If I let it go into foreclosure, do I have to pay tax on the forgiven debt?

I am not sure about the "insolvency" thing, I own a car worth 10k, owe 15k student loans, 1k credit card debt... thats about it..

[BassBoy]

Check out this link about debt forgiveness. http://www.irs.gov/irs/article/0,,id=179073,00.html. You will read that secondary properties do not qualify for this tax relief (third paragraph from the bottom).

[JRScott]

I think the short answer is yes.

There are a couple of possible solutions.

1. See if the Bank will do a Deed in Lieu. Basically they accept the property in full for the amount and call it even.

2. See if you can get a short sale on the property, harder since you have 2 separate mortgage companies.