Duplex Short Sales Make Tax Chicks Happy

said on July 23rd, 2010 categorized under: Short Sales/Foreclosure

Business woman with a calculatorThe name of this blog is Duplex Chick.

Not Accountant Chick.

To that end, please heed the following disclaimer: if you’re a duplex home owner facing a short sale or foreclosure, please consult with an accounting chick when you’re considering your course of action.

Don’t worry. She’ll be in a good mood. She’s going to have plenty of business.

See, even though Minnesota is a non-recourse loan state, meaning the mortgage is collateralized by the property; the bank can’t come after you for the amount of the loan you’re forgiven through a short sale or that’s lost on a foreclosure.

However, if you’re an investor, the IRS may perceive that forgiveness as a “capital gain”, and therefore might pursue you for capital gains tax. Oh, and remember how you depreciated the heck out of the place on your taxes? Depreciation recapture tax still exists; even if you didn’t sell the property for a profit.

On the other hand, if you lived in the duplex, the Mortgage Debt Relief Act of 2007 allows you to exclude up to $250,000 of gain if the property was your principal residence for at least two of the last five years. Whether or not this exception applies to the half you didn’t live in is a question for that accountant.

But just like the investor, you depreciated the heck out of the side you didn’t live in too, right? After all, that’s one of the many advantages of duplex ownership.

Guess what. Depreciation recapture probably applies to you too.

Depressing, yes. But remember, insofar as the capital gains tax, it pertains only to the amount of debt you were forgiven. So if you owed $150,000 and sold the duplex house for $100,000, you’d be taxed on the $50,000 you didn’t pay.

However, if you lost the duplex to foreclosure, you’d be taxed on the entire $150,000.

  1. Properties in Pakistan


    The tax rates are so high on all elements of economy for example sales tax, property tax. There are many people cannot afford these types of tax.

  2. Hector

    I would like a better answer on the matter of TAX and Duplexes lost due to Short Sale.
    There is NO clear answer from any so “Called Professional Tax” accountant, in this page and any other page, on whether the “Mortgage Debt Relief Act of 2007” allows for TAX exclusion if the property wasa DUPLEX that was short sale, and offcourse in one the owner lived, and the other is “obviously” rented in the majority of cases.
    What is your CLEAR and SPECIFIC answer on this? AS a Profesional Tax advisor..???

  3. Kari Lundin


    First, I am a Realtor, not a tax professional and you should consult a CPA for answers specific to your situation.

    From what I understand, the portion of a duplex an owner occupant lived in is exempt from tax as a result of the Mortgage Debt Relief Act of 2007. The other side is not.

    So, the amount of the loan forgiven would be divided in half, with the tax calculations done on that percentage of the loan.

    It’s important to contact a CPA who can address your exact situation. The accountants I’ve spoken with have all said while the above is the main principal that applies, other individual case factors may affect tax consequences.


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