Negative equity, can’t deduct, taxed if I foreclose. HELP!?
My wife and I have a condo we rent at a loss of $ 700/mo. We own a different primary residence as well. While doing taxes this year, we discovered our AGI is over $ 150k and we were unable to deduct ANY of our rental expenses including our $ 700/mo loss throughout the year. We are approximately $ 85,000 in negative equity on the condo.
We are considering foreclosure on the condo. I discovered the wonderful 1099-C tax implications if we were to do that. It’s not our primary residence and I do not believe we can prove insolvency.
We don’t expect the property to appreciate and surpass our liability anytime soon. The condo loan is interest only and we pay about $ 1750/mo in mortgage interest each month.
Is it better to foreclose and pay taxes on the $ 85k in canceled debt? Do we have any other options so we don’t get trashed in taxes next year?
The loss on the rental is rolled forward to future years on form 8582. You will eventually get to take the loss when you sell/foreclose.
As for the foreclosure, you will deduct the loss that occurred while you owned the property–that will show up on your 1040 on line 14. The pent-up passive loss will show up on line 17. The 1099-C will *also* show up on line 17. The losses will counteract the 1099-C (except for depreciation).
Thus the income issue is whether or not you had any loss in value before you started renting the condo (non-deductible if you used it for personal use) and any depreciation you have been able to claim to date.