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| Taxes on short sales |
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By Ilyce Glink
Tribune Media Services
Question:
I own a rental property that is worth less than the mortgage balance. What happens if I decide to sell this investment property? It is located in Atlanta, and because of market conditions it will almost certainly be a short sale.
Will my lender send me a 1099 statement for the difference between what I owe and the amount the short sale generates? Do lenders usually send the 1099 even if the lender cancels the debt owed? I wondered if there would be a tax consequence because of the sale.
Answer: Real estate investors whose properties are worth less than the mortgage amount don’t get to take advantage of the special protections and tax benefits that Congress has bestowed upon homeowners who are in trouble with their primary residences.
When an owner sells a property through a short sale, the lender will send a 1099 for the difference between what was owed and the amount accepted on the loan.
The release of indebtedness by that lender — what you should have paid back the lender — is considered a “gift” from the lender to you. The IRS considers that amount to be taxable income. That’s why the amount that is forgiven is taxed.
Some people refer to the release of indebtedness as “phantom” income because even though you don’t have any more money in your pocket, you owe tax on this phantom cash.
Homeowners who are selling their primary residences and are underwater with their mortgage do not have to pay tax on the forgiven debt, thanks to legislation that passed last year.
Real estate investors who sell a property that is underwater, however, would owe federal income taxes on the difference between the sales price and the amount owed on the loan. And, yes, the lender should send you a 1099 for you to use when you file your income tax return.
For more details on your tax liability any possible state tax liability, please discuss the issue with your tax preparer.
Question: I really enjoy reading your advice and articles in our local newspaper. My husband and I just bought a new house and are trying to sell our older home.
Our former home is a four-bedroom, two-and-a-half bath 50-year old Tudor in a fairly upscale suburban community. The house has been on the market for six months, and we’ve chosen to use a discount Realtor who will receive a 3.5 percent commission if the property sells.
We’ve had dozens of showings and, besides some negative comments about two bathrooms with wallpaper and brown paint in one bedroom, the feedback we’ve received is that the house shows in “good to excellent” condition.
We have been on a few people’s “short lists,” but no sale. Other similar homes nearby listed in the same price range have sold.
Should we take the house off the market now and then re-list in the spring to avoid the listing getting stale? Should we repaint and do other improvements while it is off the market? Or, should we leave the property on the market through the remainder of fall and the winter? Thanks for any suggestions you have.
Answer: These days, homes don’t sell in minutes, hours or days — they sell in months or years. It’s not unusual to have a home sit on the market for six months to a year. There are a large number of homes for sale that have been on the market for nearly two years.
These are tough times for home sellers. Buyers are in control and are dictating the way homes are sold. One thing that buyers want is to move into a home that’s in perfect condition. If they’re not going to move into a home in perfect condition, they tend to want a massive discount on the price.
It’s important to do everything you can to resolve any issues a buyer might have with your home. Buyers don’t have the time, energy, interest or cash to resolve issues like bad wallpaper and unfashionable paint. They’re expecting you to take care of that for them, particularly in areas where there are a lot of homes on the market.
Since you’ve had dozens of showings and other similar homes have sold in the neighborhood, you’re probably priced about right for the market or maybe a tad high. You may have other issues with your property — its location in the neighborhood or on the block, the type of house or age of the property, the layout of the home, or any of a number of other factors — that push the buyers to purchase other homes over yours.
Even if all of those other issues aren’t problematic, being competitively priced isn’t going to be enough if other homes are in better shape or don’t have other decorating problems.
I recommend that you spend a week having the wallpaper stripped from these two bathrooms, and then paint them and the bedroom in a color that coordinates better with your furnishings. I wouldn’t pull the property off the market, because it appears you’re getting traffic. You just have to figure out how to deliver what your target buyer is looking for.
While you’re busy painting, I think you should also take a look around the house and see if there’s any other paint you can freshen up. Is the house vacant? If so, you may want to stage it with a minimal amount of furnishings in order to make it look more appealing to buyers. If you still have it chock full of your old stuff, you might consider editing that down so that buyers feel the home is bigger and has more space.
Although you have the property listed with a full-service discount Realtor, consider offering some sort of cash incentive to the agent who brings the successful buyer to the table. While great agents won’t force their clients to buy your home simply because of the cash incentive, they’ll certainly make sure it gets a showing.
Finally, start visiting the competition. Then take a step back and see how your home compares with others that have sold. If you see some deficiencies in your home, you should either fix those issues or reduce your price.
Question: My neighbors do not want to give me access to their fenced-in yard to perform maintenance on my house, gutters, etc. They also have a doghouse against my house and have attached a fence against it to make a “pen” to house their pit bulls. Is there a city ordinance against all of this? What city bureau would I contact?
Answer: Many cities have ordinances that regulate the ability of homeowners to use adjacent lands to maintain their homes. In your case, it’s in the neighborhood’s best interest that you should be able to maintain your home. If you can only do that by obtaining access through your neighbor’s yard, you may have a right under your city ordinances to have limited access for that purpose.
You should call the city and find out what agency you can talk to determine whether you have that right or not. You might find that your alderman’s office or other local municipal governmental office may have information available for you.
In some towns and cities, you can now go to that town or city’s Web site and research your question.
After you have done some of this research, if you still have not found your answer, you might have to ask a good contractor in your area the question or ask a real estate attorney. The contractor might have experience with this issue, having fixed buildings and homes in your area. That contractor might even be able to quote you the law that allows neighbors to have limited access on other people’s property to
make repairs to their own properties.
The attorney might have that information as well.
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