What losses can be deducted to offset a 1099-C for an investment property?

I own this home since feb/06. Will I be able to deduct mortgage interest, taxes,maintenance and other expenses to any income I have to report (1099-C)? What about the downpayment I walked away from. In my case I put down 20k. My loan balance is $172K and properties in area are appraising for $172K-$177k. I purchased for $192k. I 've paid about 23K in interest only payments and other expenses in my attempt to try and sell and not ruin my credit. But I'm at the end of my rope. I would like to understand all the financial consequences of doing this "deed in lieu" beside of course ruining my credit. Thanks

What losses can be deducted to offset a 1099-C for an investment property?
Was it a rental property? If so, you should have filled out a schedule E for your 2006 tax return, and you would have been able to deduct the expenses that you have listed above, in addition to others related to the property (including depreciation). By doing a "deed in lieu" (which I have unfortunately done in the past) you are basically turning the property back over to the lender in exchange for your remaining loan balance. I'm not clear as to what the downpayment you walked away from is, is it this property or another property? If you purchased it for $192K and your loan balance (interest only loan) is $172K and you put down 20K then it would seem the downpayment you are talking about walking away from would be the 20K you would lose by doing the deed in lieu of. It seems to me though that you would have a loss of around 20K on this investment property. You bought it for 192k and would be giving it back to the lender in exchange for them forgiving your debt of 172k to them. therefore you would only lose your 20k downpayment. You would have to subtract from the 20k any depreciation that you incurred on the property. Also, just to let you know a deed in lieu does affect your credit, but not as much as a foreclosure would. One other thing you could consider doing would be seeing if your lender would allow a "short sale". That would be them allowing you to sell the property for less than you owe them, and them not asking you to make up the shortage.
Reply:The amount on the 1099-C is ordinary income. There are no adjustments unless you have information that the number on the 1099-C is incorrect (they frequently are). If you itemize your deductions the interest you paid is deductible just as it would have been had you not gotten a 1099-C. If you rented the property and filed a Schedule E you may have some losses that will apply but that also will not change the fact that the amount on the 1099-C is ordinary income.
Reply:OK, before we talk about form 1099C, we need to talk about form 1099-A (abandonment). If the lender does not sell the property in the same year that you abandon it, they send a 1099A showing the FMV of the property. You do not report this on your tax return. Since it is getting late in 2007 this may come into play.





In the year the lender sells the prop, they will send you a 1099C for the difference between what you owe and the proceeds of the sale. The value of other houses in a declining market is not a good indicator, so let's say they sell the house for $150k, while you owe $172K. The 1099C will show $22k as income to be reported.





There are no deductions that are a result of this taxable event. Presumably you took the interest deduction etc in the year such expenses were incurred.





There is an exception for bankruptcy but that may not be your best play. Someone already addressed the insolvency exception,so I won't repeat it.
Reply:1099-C (Cancellation of Debt Income or COD) income is excluded to the extent you were insolvent at the time of turning the property over to your creditor.





You are insolvent when you have a negative net worth (Liabilities are higher than Assets)





http://www.irs.gov/pub/irs-pdf/p908.pdf





The above link is to Publication 908 (Bankruptcy Guide)


On page 21 it spells out under what conditions you can exclude COD and how much and what you must do afterwords.