Do you always have to pay depreciation recapture and capital gains tax when you sell your duplex via a short sale or lose it to foreclosure?
I spoke with three accountants last week and the answer, as always, is circumstance dependent.
If a duplex home owner can prove insolvency, the tax obligations may be avoided.
Basically, it’s when all of your assets don’t outweigh all of your liabilities. With a home mortgage, a duplex mortgage and credit card debt, for many that may be easy to prove.
However, as explained to me, you have to be able to prove you were not only insolvent before you sold or lost the duplex investment, but after as well.
For example, if you have a $100,000 in equity in your home, with a $50,000 mortgage, and no equity in your duplex that has a $200,000 mortgage on it, you owe $250,000 and only have $100,000 in assets. Therefore, you’re insolvent.
But, after you sell the duplex via short sale or lose it in foreclosure, you now have $100,000 in equity in your home and owe $50,000 on the note. In other words, you’re worth $50,000 more than you owe.
As always, be sure to speak with your tax chick for specific advice.