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Defaults are rising and there is a lot of buzz in the Real Estate industry about Short Sales. Everybody and his brother is spamming me with seminars to educate me on "how to do them".
Short Sales are NOT for everyone. I will be happy to assist you with a short sale on your property but please read this:
A client called me the other day asking if I could do a Short Sale on an investment/rental property he has and after hearing the details this was my conclusion:
- His property would probably sell for 100k less than what he owes : around $320k
- The $100k forgiveness of debt would be taxed as income
- Additionally he would have to pay the FRPTA of 3.3% to the state
All I could see was one huge tax liability. Depending on his tax bracket, based upon the above he could be liable for approx $40,000.00 in taxes on a Short Sale (quick mental guestimate). So I told him to consult with his accountant regarding the tax ramifications and if he said to do it call me back. In his situation his best option may be to just let the lender foreclose. However, with a foreclosure the possibility of a deficiency judgment may exist.
You really need to look closely at all the options and the consequences. Always consult with a tax adviser or CPA prior to doing a Short Sale. Call me and I will be happy to discuss the alternatives.
© Randy "Lazarus" McAtee
Owner/Broker Lazarus Realty
559-301-1647
email me
2 comments:
Tax liability is often a concern with short sales (and a visit to your tax advisor is mandatory). However, the same liability exists with a forclosure. Aggravating the foreclosure situation, a seller has absolutely no control at what price the home sells. So, instead of tax liability on $100,000 (in your client's case), it could EASILY be $150,000 or more.
Also, the liability may be reduced or even non-existent if the seller were in the home 2 years or more. I'm assuming your client has not been as you bring up the FRPTA.
Finally, what tax bracket would require $40,000 in taxes on a $100,000 liability? Even if you reduce that by the FRPTA (~$10,000), he would have to be in a 30% tax bracket. If he were earning enough to justify having to pay 30% in taxes and can't make payments on a $320,000 home, he's got other problems.
In all cases I can think of, if the choice is between a foreclosure and a short sale, a short sale is ALWAYS the better option.
Finally, in many states (California being one) it is very difficult (if not impossible) for a lender to get a deficiency judgement.
Thanks for the comment. I consider myself better educated in the matter.
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