AboutJohn Stancil, CPA Expertise I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I teach tax and accounting at a small church-related college. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a part time tax practice for over 30 years. I am a member of the AICPA, National Society of Tax Professionals, and the Institute of Management Accountants.
Experience I hold a doctorate in Accounting, and four professional certifications: CPA, CMA, CFM, and CIA. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I write a monthly tax column for the local newspaper.
Expert: John Stancil, CPA Date: 7/11/2008 Subject: Deed in Lieu of Foreclosure on Investment Property
Question QUESTION: I saw your answer to Shannan regarding a similar issue we have, except that our deed in lieu is on investment property. As debt that is canceled or forgiven is considered taxable income, can one still qualify for exclusion of gain from the sale even though it is not our primary residence. No rental income or anything was ever made on the property - it was just a bad deal gone wrong. If so, how/where can I find out what qualifies as an exclusion of gain.
Thanks,
Daphne
ANSWER: Daphne,
Thanks for your question.
Since it was not your primary residence you are not eligible to exclude the gain from forgiven debt. As it was investment property you may be able to offset the gain with a loss on the "sale" of the property.
Hope this helps.
John Stancil, CPA
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QUESTION: I'm not sure I understand the second part of your response so I just need to clarify and maybe a little more detail will help with a response. The property was "purchased" through an investment proposal involving a builder and realtor whereby tenants would be provided and be ready to move in prior to the completion of the home. Our initial investment was $5,000. Those parties arranged a construction loan (in excess of $250k) from a bank and we closed on the contruction loan which means the deed is in our name. However, prior to obtaining a conventional mortgage from another lender we decided that we would not and could not close on the properties (in fact we invested in three all together - two of which were financed by another institution and we are currently in the midst of a civil lawsuit as well as a class action against all parties involved in this fraudulent scheme). One of the construction loan lenders has offered a deed in lieu for $116k (considerably less than the construction loan). So you see, we haven't actually lost anything (except for the initial $5,000 investment). As you can see, this is a rather complex issue.
Answer You have a $5000 investment. If you get $2000, for example, as a settlement, you have essentially sold the property for $2000 and you have a loss on the sale of your investment. Your basis is $5,000, your proceeds are the smaller of your canceled debt or the FMV of the property. The loss is deductible on Schedule D.
