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Short Sell Investment Property? 6 Tips

I have many clients that call me wanting to short sell investment property, they are generally worried about the tax liability and implications of the short sale. Owing the IRS money that was never made is nothing anyone wants to happen.

As most of you know, if the home is your primary residence, the Debt Cancellation Act of Congress protects the homeowner.  Basically, the Lender will send a 1099 C for their loss on the property, which will in turn show the homeowner with the gain as extra income, even though this is phantom income in the case of a primary residence. The IRS has one form that cancels this phantom income.  However, as an investor, this cancellation of debt doesn’t exist. What are your options as an investor who may be struggling with a property and losing money everyday? You may be able to short sell investment property you own like any other but you must consider your tax liability when doing so.

When I have an investor client, these are the steps I suggest they take:

  1. Find your loan documents. See if your lender has the right to sue you for any deficiencies or just take the property
  2. In the loan documents, check if it is a non-recourse loan (CANCELLATION OF INDEBTEDNESS ─ IRS- IRC SECTIONS 108 AND 1017), non- recourse loans are not taxable
  3. Talk to your tax accountant. The tax accountant I spoke with, Randy Kiesel in Chandler Arizona, stated that at the time of the short sale of investment property, if the owner can prove technical insolvency there is no tax liability. More on this below…
  4. Analyze the percentage of loss as you short sell investment property, if you have lost over 15% in value I suggest my clients think about selling the property normally.
  5. Determine whether you can purchase in 2 years for less than the amount you owe on the property.  Calculate 3% increases for the next two years.  I am being lenient in allowing for value increases in the next two years.
  6. Make your decision. If you can short sell investment property you own with no tax liability, in my opinion it is a good option.  Start fresh with new investment properties at the new low market prices of homes.

Remember, short sales require a proven hardship like you can no longer afford the property, medical issues, divorce, etc.

So what is technical insolvency anyway? It is simply showing that your debts are more than the fair market value of your assets.  This must be proven at the time of short sale.  In today’s real estate market, if you own several properties, it is probably easy to show debts higher than assets.

Most Arizona homeowners lost 25-50% of value on their homes, this of course does not exclude investors.  Investors, I suggest you speak with your tax accountant and determine if you will have any tax liability.  Wouldn’t it be a better option to sell now, cut your losses & purchase at the reduced prices in the next 2 years?

Then pick up the phone and contact us… We will guide you toward the best possible outcome

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