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.
|
