I have another client who is in your same boat, they're losing about $400/mo on the rental property which is worth less than what they owe, and they still have their primary residence. They've decided to do the short sale.
There's no getting out of doing a short sale & it not impacting your credit. What really hurts your credit more than the short sale itself is missing payments & having those compounding 30 day lates stacking up.
BUT you can recover from it in less time than you may think. You won't be plagued by a super low credit score for 5yrs. In fact people who do a short sale after missing as much as 15 payments, CAN see their credit rebound & be in a position to purchase again (should they want to) within 2yrs. under current guidelines w/ an FHA loan.
Good News for Short sales, with new laws passed in January & again on July 15th, is that if the bank(s) agree to do a short sale, they CANNOT pursue you in the future for a deficiency judgment & this INCLUDES investment properties, like yours.
Tax Consequence: Because this is an investment property & if you cannot claim that this property WAS your primary residence for 2 of the last 5yrs, you will be subject to the IRS stating that the Negative balance you short the bank with, they will treat as "income" & tax you & whatever your tax rate is. If your negative balance at the end of the day is $120K, the IRS will say "You MADE $120K & owe us that tax".
If you can prove to the IRS through working with your CPA that you are up the proverbial financial creek, you may be able to file form 982 & try to prove a case for insolvency & possibly reduce or eliminate your tax liability. Keeping this property is more than just losing $400/mo, you're still trying to add water to a sinking ship.
If you'd like to talk to me more about your situation, please email me DIRECTLY, I don't look back on this same Trulia thread for answers posted after mine.
Realtor Since 1996
Main Street Realtors
Short Sale Expert
Your lender may allow for you to pay less than what is owed on the condo if you qualify for a short sale. Keep in mind a short payoff will affect your credit but may still make financial sense. Consult a tax advisor regarding this as well.
I my opinion the most important question that you should answer yourself first is: does it benefit you to keep the property. The tax ride offs that you are using and all the expenses that you have to cover â€“ des keeping the property benefits you?
Is the property currently rented? Will you be able to proof a hardship to the bank to have them accept a short sale pay off of the loan after you sell the property.
Will be happy to evaluate your situation with you and advice you about all the details.
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