Short Sale of Rentals prior to Filing Ch7?

[deyoonvaca]

Hello all,

I am in the process of short-selling some residential rental properties. The banks are willing to forgive the deficiency. I'm not sure yet, but I expect to be filing Ch7 in the next few months.

My question - If I short-sell the properties now, creating taxable income (1099-c), will the tax liability created by that be wiped clean by filing CH7 later in the same tax year?

This is such a new scenario that I have had trouble finding solid information on how this is handled. I would like to avoid foreclosure on the properties but I'm concerned that doing that (even though it's in everyone's best interest) would create a tax liability for me personally versus a tax liability for the BK estate.

[teacher]

If you short sell the properties, there shouldn't be any taxable income. In my opinion, if you are filing chapter 7, why are you trying to keep any of the properties besides 1 residential property for yourself?

[whipster1]

If you are insolvent, meaning you owe more than you have in liquid assets, 1099's are of no consequence.

[HHM]

Yes, any income tax consequences for foregiven debt will be wiped out in BK because the BK discharges the underlying liability (the debt that was foregiven).

HOWEVER, you could still have capital gains tax issues if the short sale price is more than what you "originally" purchased the property for (not counting subsequent refi's).

[deyoonvaca]

Thank you for your help. There will not be any capital gains... that's for sure.

SO... you are saying that even if I short-sell prior to BK, the BK will wipe out any related expenses - i.e. tax liability of 1099-c. ???

On another note - does settling the accounts (short-sale) prior to BK help with credit in the future? I am hoping that short-sale notes on my credit will look better than a bunch of foreclosures. Any idea?

Thanks again! I appreciate it.