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If I sell investment property for less than the adjusted basis, do I owe capital gains?

August 12, 2011


From:  John
Date:  14 Oct 2008

I purchased property in 2005 for $1,100,000 using about $450,000 from proceeds in a 1031 exchange as a down payment. My adjusted basis was about $650,000. The original mortgage for the property was about $500,000. After one year I refinanced for $797,000 and took $297,000 in cash. Now the fair market value of the property is about $600,000.

If I short sale or walk away, am I still responsible for the full capital gain tax? If I sell for less than the adjusted basis, am I still responsible for capital gains taxes?

Thank you

John

Answer

Date:  5 Nov 2008

Hello John,

If the sale price of the property is the fair market value, which you estimated was $600,000, and given your tax basis of the property was $650,000, you will probably have a loss relating to the sale. If this was a rental property, the loss could be an ordinary Section 1231 loss.

You will have ordinary cancellation of debt income of about $797,000 - $600,000 = $197,000.

To really see how your situation will settle out, you need to consult with a tax advisor. Thatís our business!

Good luck!
Mike Gray

We have more answers to frequently asked real estate tax questions! We also offer up-to-date information about new tax real estate tax developments in Michael Gray, CPA's Real Estate Tax Letter.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained on this website was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

If I sell investment property for less than the adjusted basis, do I owe capital gains?

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