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Does it Matter if I Rent Out My Home Before Doing a Short Sale?

By
Real Estate Agent with Long and Foster Real Estate VA License # 0225089470

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. 

Comments(10)

David Burrows
Classic Realty - Fairfax, VA
No Pressure, Just Seriously Devoted to Real Estate

Good advice and thank you very much. I just shared similar information with a former client of mine.

Mar 01, 2011 08:55 AM
Brad Hornshaw
Brad Hornshaw Realtor Lynnwood, Bothell, Everett - Lynnwood, WA
Realtor, Listing Agent, Buyers Agent, Investments
Hi Chris A very good piece of information thanks for sharing with us ...........Brad
Mar 01, 2011 09:51 AM
Cindy Jones
Integrity Real Estate Group - Woodbridge, VA
Pentagon, Fort Belvoir & Quantico Real Estate News

Lenders do have a different view of primary residences and rental properties when it comes to short sales.  And then as you point out there is the IRS veiw as well.

Mar 01, 2011 09:55 AM
Chris Ann Cleland
Long and Foster Real Estate - Gainesville, VA
Associate Broker, Bristow, VA

David & Brad:  It's such a common question from Short Sale Sellers.  I always recommend that they speak with a tax adviser.

Mar 01, 2011 09:58 AM
Marte Cliff
Marte Cliff Copywriting - Priest River, ID
Your real estate writer

Good advice. Nearly everything we do any more has some kind of tax consequences.

Mar 01, 2011 11:31 AM
Eric Michael
Remerica Integrity, Realtors®, Northville, MI - Livonia, MI
Metro Detroit Real Estate Professional 734.564.1519

Yes yes, Primary residence. So many people think they can get away with this. More than likely won't turn out good.

Mar 01, 2011 12:20 PM
Ginny Gorman
RI Real Estate Services ~ 401-529-7849~ RI Waterfront Real Estate - North Kingstown, RI
Homes for Sale in Southern RI and beyond

Excellent post Chris Ann...i've had one that got themselves in a pickle by renting out their home prior to coming to me & it cost them some money with the IRS...

Mar 01, 2011 12:46 PM
Donna Foerster
HomeSmart Realty Group - Parker, CO
Metro Denver Real Estate Assistant

Hi Chris Ann~ It's so important for consumers to ask questions when they are unsure. Often times the best advice we can give then is to seek out the appropriate professional, in this case a tax adviser.

Mar 01, 2011 03:36 PM
Bob & Leilani Souza
Souza Realty 916.408.5500 - Roseville, CA
Greater Sacramento Area Homes, Land & Investments

Great blog post topic, Chris Ann! Consulting with a tax and legal professional is always a good idea before anyone decides whether or not they should try to short sale their home...owner-occupied or not. :)

Leilani

Mar 01, 2011 05:20 PM
Chris Ann Cleland
Long and Foster Real Estate - Gainesville, VA
Associate Broker, Bristow, VA

Marte:  The Short Sale option has red flags of tax implications for more candidates than you'd think.

Eric:  I don't think folks looking to rent are even THINKING about this consequence, so I honestly don't think it's a malicious thought to pull the wool over someone's eyes. 

Ginny:  If they had just spoken with you first, you could have referred them to a tax adviser.

Donna:  And the sign of a good real estate agent is knowing the situations when getting a tax professional, or lawyer involved, is necessary.

Leilani:  I'm shocked by the number of agents out there taking Short Sale listings that don't know the potential pitfalls and when to refer clients to tax professionals.  Scary. 

Mar 02, 2011 03:04 AM