I have many clients that call me wanting to short sell their investment properties, they are generally worried about the tax liability of a short sale- AKA owed the IRS on money the investor never made. 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 in the property (which in turn shows the homeowner with the gain as extra income- even though this is phantom income) – as a primary residence, the IRS has one form that cancels this phantom income. However, as an investor- this cancellation of debt does not exist. What are your options as an investor, struggling with a property and losing money everyday?
If 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 "EUR 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, Chandler AZ- stated that at the time of the short sale sale if the owner can prove technical insolvency- there is no tax liability (See further explanation of insolvency below)
4. Analyze the percentage of loss- if you have lost over 15% in value- I suggest my clients think about selling the property
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 sell 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- you can no longer afford the property, medical issues, divorce, etc.
So what is technical insolvency- showing that your debts are more than the fair market value of your assets. This must be proved at the time of short sale. In today's real estate market, if you own multiple 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. Would not it be a better option to sell now, cut your losses & purchase at the reduced prices in the next 2 years?Immobilienmakler Heidelberg Makler Heidelberg
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Source by Charlotte Allred