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

By
Real Estate Broker with Long & Foster REALTORS®, Gainesville, VA 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. 

Posted by

Chris Ann Cleland, Associate Broker- Licensed in Virginia, GRI, SFR, Northern Virginia Short Sale Specialist. Affiliated with Long & Foster, 7526 Limestone Drive, Gainesville, VA 20155.  To contact Chris Ann, call 703-402-0037 or email chrisann@LNF.com.  Or you can visit her website:  www.nvarealestate.net.

Header photos taken by Chris Ann Cleland.

The opinions expressed in this post are those of Chris Ann Cleland, not those of Long & Foster REALTORS®.

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Topic:
Real Estate General Information
Location:
Virginia Prince William County Bristow
Groups:
Bartender, Make it a Double
Diary of a Realtor
Short Sale REALTORS®
Short Sales Specialists
Never Answer The Same Question Twice
Tags:
renting before selling your home in a short sale
selling your home in a short sale
mortgage debt forgiveness and short sales

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Rainmaker
537,977
Eric Michael
Metro Detroit Real Estate Professional 734.564.1519
Remerica Integrity, Realtors®, Northville, MI

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

March 01, 2011 08:20 PM
Rainmaker
1,003,517
Ginny Lacey Gorman
Homes for Sale in North Kingstown RI and beyond
Phillips Post Road Realty ~ 401-529-7849~ RI Waterfront Real Estate

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...

March 01, 2011 08:46 PM
Rainmaker
785,335
Donna Foerster
Metro Denver Real Estate Agent
Cherry Creek Properties, LLC

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.

March 01, 2011 11:36 PM
Rainmaker
934,148
Bob & Leilani Souza
Placer County, CA: Foreclosures, Auctions, Rentals
Souza Realty - Roseville, Rocklin, Lincoln, Loomis, Granite Bay, Penryn, Newcastle, Auburn, Meadow Vista (California)

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

March 02, 2011 01:20 AM
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Chris Ann Cleland
Associate Broker, Northern VA
Long & Foster REALTORS®, Gainesville, 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. 

March 02, 2011 11:04 AM
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Chris Ann Cleland

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