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When to Decide to Sell a Home at a Loss


While everyone imagines when they purchase a home that it will appreciate in value and that one day when they decide to sell they will be able to reap a profit, that is sadly not always the case. This is a reality that many homeowners have had to face in the last few years as a result of the flagging real estate market. The simple reality is that many homeowners are facing the difficult decision of whether they should sell their home if it means they will need to take a loss on it. In some cases, you may not have any other choice. If you are being forced to relocate for employment, the options are obviously limited. Either sell now, potentially at a loss, or hold onto it and hope for better times; if you are able to do so financially. If you are not able to meet the payments on the mortgage any longer, selling at a loss can sometimes be a better option than going through foreclosure; provided you can get the lender to agree to a short sale.

Beyond the fact that you will be taking a loss on the home rather than raking in the profit you had once imagined, there can be numerous consequences to selling at a loss that must be considered.

Less Money to Move On

Perhaps one of the biggest drawbacks to selling a home at a loss for many homeowners is the fact that they will not have as much, if any, money to move on. If you are selling with an eye towards the purchase of another home, this can be a serious drawback. Lenders have become increasingly wary of making home loans and many are now requiring larger down payments. If you sell your home at a loss, this could mean that you forfeit the ability to purchase another home for quite some time in the future until you are able to save up an adequate down payment.

Tax Consequences

One consequence that many homeowners may fail to take into consideration when thinking of selling their home at a loss is higher taxes. Traditionally, real estate has served as tax shelter for homeowners. The opposite may be true if you sell your primary residence and take a loss on it. In this case, you will not receive a tax deduction. Exactly what does that mean for you?

Let's take a look at a couple of examples. Suppose you paid $300,000 for your home and you are now selling it for a net sales price of $350,000. A few years ago you took out a second mortgage to make improvements on the property and so now with the first mortgage, you have a combined mortgage of $400,000. When you sell, this means that you will have a gain of $50,000; regardless of how much you actually owe on the property. The IRS only looks at the tax basis; the sales price less the amount you paid. This means you will have a tax gain, but fortunately you may be able to exclude that gain for tax purposes if you meet certain qualifications.

Suppose you paid $300,000 for your home and you are now selling it for $250,000. In this case you have a $50,000 loss. The flip side to the coin is that the IRS won't recognize the loss in the prior example and they won't let you write off the loss in this example either. The only time you can claim a tax loss when selling real estate is if it is investment property.

Short Sale Consequences

If you do still owe a mortgage on your home and you will be selling it for less than what is owed on the property, keep in mind that the lender must agree to the short sale of the property. Also, even if they do agree, it is imperative that you make sure you reach an agreement before the sale regarding the outstanding balance of the loan. It is possible that the lender could still hold you responsible for that balance, essentially meaning that you will not be able to walk away free and clear. Also, even if the lender does not hold you responsible for the outstanding balance, there could be tax implications associated as well, so it is a good idea to talk to a tax advisor before you make a final decision.

Making the decision to sell your home at a loss can be difficult and painful. Educating yourself about the potential consequences can help you to make a more informed decision.


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