Does it Matter if I Rent Out My Home Before Doing a Short Sale?
Very often, home owners who may be tittering on the edge of a Short Sale will ask me if they can rent out their home before conducting a Short Sale the following year. Of course they can do that! The obvious reason why someone would want to do that is in hopes that the market will increase and after renting the property out for a year, the loan to value ratio would have the home right side up, or at least close. But what if the value doesn't come up and you have to do a Short Sale after relocating to another home?
There is one potentially large issue that needs to be considered before renting out a home that you may later decide to sell in a Short Sale. That would be considering the tax ramifications of forgiven debt.
Under the Mortgage Debt Forgiveness Act, the IRS waives tax liability on forgiven mortgage debt under particular circumstances. One of the circumstances is that the property with the forgiven mortgage debt must be a principal residence. If you've rented out a home for a year before selling and moved into another home, the property may no longer be considered a principal residence.
ALWAYS CONSULT WITH YOUR TAX ADVISER BEFORE MAKING ANY DECISION ON CONDUCTING A SHORT SALE. There can be state and federal tax implications that you may not have considered.