FEAR: perhaps a CPA will answer.
On your principal residence, I don’t know if you can write off the loss at all, if actually SOLD at a loss.
I think that $3K ONLY applies to stock market losses, to discourage speculation.
In a short sale, you are not receiving any money. Lender is agreeing to “settle” and your debt is being forgiven. The debt relief is reported as income, and you owe income tax. The debt is done. With a RENTAL, I believe that you are selling the property for what the lender reports, but if a rental, you have depreciation to recapture as well.
There is no ordinary income from the house sale, but I do THINK that you can write it off as an investment loss, (without $3K limit), and carry forward if necessary.
Foreclosure is viewed differently depending on whether or not it was purchase or refi loan that is being defaulted on.
There are also convoluted ways, like keeping your 1st current and let the 2nd default. Then the 2nd could takeover the 1st, without a default on the 1st.
Further, my belief is that BK will not absolve you of debt to the IRS.
This is the danger of a short sale that many don’t seem to be aware of. Receiving a 1099 isn’t a guarantee, but most people aren’t in a position to worry about that, or not do a short sale to avoid the 1099.
The lender doesn’t accept a SS just becuase you want them to, and for reasons mentioned previously, it’s not so easy on a rental property.
