The highs and lows of parenting and real estate.

A Short Sale, From the Inside

I’m considering attempting to short sale a property I own. It feels kind of weird to write about this; sort of like I’m telling you what I wore to bed last night or how much money I made last year (a tanktop and jammie pants, and not as much as I thought I would when I got into real estate). You know, too personal. But then again, it’s not like I’ve ever had much use for things like ‘a filter’ or ‘boundaries’. Both highly overrated, if you ask me.

Anyway, no, there hasn’t been a horrible tragedy in my life. My husband hasn’t lost his job (as of 8:10 this morning when he last checked in), no one currently has a bank account-draining medical issue, we aren’t getting a divorce (geez, I really feel like it’s tempting fate to even type all of that out… Fate, I’m totally not tempting you, swear. Would you like a cookie?). The situation with my rental property is fairly complicated, but basically it comes down to the fact that it was supposed to be an investment, and lately I’ve come to the conclusion that not only is it never going to actually make me any money, but if I don’t jettison it soon, it’s just going to continue sucking resources that could be put toward college saving accounts for the kids or retirement or us until it pulls us all down under with it, like the Titanic.

A few weeks ago I decided I needed to start researching options about what to do with my rental, other than praying oil is discovered in the backyard or that the housing values suddenly skyrocket only in Dobson Ranch, on the West side of Dobson, North corner. When we met with our tax guy a few months back, he’d made an off-hand remark along the lines of: You’re not thinking about shortsellling that rental property, are you? Because that’s a tax nightmare… At the time I was still hoping a band of leprechauns with a collection of winning lottery tickets was going to make the backyard of my rental property their home, so I didn’t ask exactly what kind of nightmare he was referring to. Now that I was coming to terms with the reality my situation, I figured the first thing I needed to do was find out exactly what my tax liabilities would be if I pulled the trigger on this whole ‘steer the ship around the iceberg’ plan I was hatching (yes, I totally mixed my metaphor there, earlier I called the rental house the Titanic, now I’m saying we’re the Titanic and the rental problem is the iceberg. Just go with it).

I started out by calling my tax guy’s secretary and asking to have him call me so we could set up an appointment to discuss some tax issues. He called me back the next day and told me the openings he had in his schedule and then asked why I wanted to meet.

Me: Well, I haven’t done anything about it yet, but I’m considering short selling my rental property. You mentioned there would be huge tax consequences to this, so I just wanted to sit down with you and go over what they would be so I can make an informed decision about all of this.

Tax Guy: Uh… well actually I don’t deal with situations like that. So… I’m going to have to refer you to someone who… has more expertise… in that area.

Me: OK… but we’ve been working with you for years, and I haven’t done anything, yet, I just want to know what the potential consequences would be…

Tax Guy: Yeah, I just can’t help you. Call Tax Guy 2, at 480-666-5555.

I have to admit, this threw me for a loop. I just wanted to weigh the risks. If the repercussions of doing this short sale involved being strung up by my ankles with my hands tied behind my back while an IRS agent systematically plucked every single one of my eyebrow hairs and eyelashes off my face and a football game with no cheerleaders, commercials or halftime show played on an endless loop on a big screen in front of me, well then I probably wouldn’t do it. But if it involved paying a fraction of what I was underwater on the house to the government and then being done with the whole mess, it might be something to consider. I didn’t understand why the Tax Guy I’d been trusting with all my financial advice was abandoning me now.

I wasn’t happy, but I persevered. I called Tax Guy 2 and left him a voicemail explaining the situation and who I’d been referred by. He left the following back on my voicemail, two days later:

Hi Elizabeth, this is Tax Guy 2. I got your message. Um, yeah, I don’t actually do that either. I… just don’t have the necessary legal knowledge. So I’m going to have to refer you to someone else. Tax Guy 3, 480-777-8888.

By the time I got this, I was pissed. And I was frustrated, indignant, defensive and just wanting to be done with the whole thing. I immediately picked up the phone and dialed 480-777-8888. Of course I got his voicemail and left this message, my voice dripping with sarcasm and anger:

Hi, Tax Guy 3, this is Elizabeth Newlin. You’re the third CPA I’ve called in the last week. You probably won’t help me either. I’m looking for someone to sit down with me and discuss the potential tax implications of shortselling a rental property I own, which is apparently akin to asking for advice on how to murder my neighbor, at least according to you people. So it would be great if you could call me back and be willing to help me understand the technicalities of our tax system. Because, you know, that’s kind of like your job, right?

As I hung up the phone my anger evaporated and I thought to myself, I just yelled at that guy for no reason. I’m going to guess he’s probably not going to call me back.

You can imagine my surprise when, a couple of days later I got a call on my cell and had this conversation:

Tax Guy 3: Hi, Elizabeth? You left me a message about wanting to discuss the tax implications of a short sale? I have next week pretty open, do you want to make an appointment?

Me: Uh, yeah! I do! I’m so sorry about that message I left you… It was probably a touch more forceful than I intended it. I was just frustrated.

Tax Guy 3: Oh, I didn’t even hear it. My secretary just gave me the message to call you.

Me: Oh good! I mean, yeah, well it wasn’t angry or violent or anything. What I mean is, when can I come meet with you?

Tax Guy 3: How about next Tuesday at 10? Bring your tax returns for the last two years and all of the financial information about the rental property.

I met with Tax Guy 3 yesterday. He laid it all out for me. He also explained that many CPAs won’t touch these situations because the information is so complicated and difficult to understand. They don’t want to be held liable for a situation they don’t have a handle on. After all of that drama to even find him, it was amazing to me that he sat down and had actual concrete answers for me. The picture he painted wasn’t perfectly rosy, but just having the information has been such a relief to me. It makes me wonder how many of my clients have gone through a similar ordeal in trying to research their own situations. As their Realtor, I can help with the potential scenarios about the process of actually selling the property, but for legal and tax implications I tell them to contact an attorney and a CPA. I had no idea just finding one who could help would be this difficult.

The point of all of this is, I want to throw a shout out to Tax Guy 3, Tim Walch (my blog is incredibly influential, you know. There are literally tens of people I’m not related to who read it regularly). I appreciated his help and guidance more than I can tell him. I will refer him to all of my clients. Call him if you need advice. Tim Walch, 480-557-0561.

16 Responses to A Short Sale, From the Inside

  1. Great blog Liz, I always enjoy reading it.

    • Hey KJ, you don’t do stuff like this, do you? I totally would have called you if I thought you did!

  2. Tell Tim Walch that he just went in the virtual rolodex of a complete stranger.

  3. Well? What did he say? You should email us and update us, since we, god forbid, are weighing our options as well. and conveniently enough your tax guy #1 did not call Karl back either. HUH!

  4. So, what are the options? I’m sure it being an investment property makes it even more complicated. Especially if you have a second mortgage on it. A friend of mine attempted to short sale on his investment properties (he had four) and ended up just having to declare BK (not trying to tempt fate here – fate eat Elizabeth’s cookies). Nasty situation with four lenders threatening to sue and garish wages.

    • Yeah, it is complicated. And we have a HELOC. So basically if the short sale works and the bank allows it, I will end up paying income tax on the forgiven amount on the HELOC. Which will be a pretty penny. But still like 1/5 of the HELOC amount (which I pay $400/month on above and beyond what I’m getting in rent on the property and that’s just for interest, so it’s never getting any smaller) and I can be put on a payment plan with the IRS and hopefully get it all paid off within a couple of years.

      Luckily, it sounds like my bank (Wells Fargo) will allow me to attempt the short sale without getting behind on my mortgage. So I can try it and if it’s declined then I can reconsider my options (continuing to rent it and hemorrhage money or some kind of BK) from there.

  5. If it were me, I’d drop Tax Guy #1 in favor of Tim Walch for my regular tax work too.

  6. I just heard on a local radio show the other day that if someone is thinking short sale they might want to get on it because the law Bush put through in 2007 to forgive the balance ends in 1012. Now, I don’t know if that was the part where the mortgage company can’t come after you for the difference once they’ve agreed to let you sell it for less than the mortgage owed or if it was to prevent you being taxed on the forgiven amount.
    Good luck and keep us posted Mini.

  7. Good luck, I attempted to work with a bank while mostly current. A year later and 3 days from foreclosure they finally were able to “consider my offer”. Common sense has no place in the banking world!

  8. You and your readers considering short selling a rental property might also want to contact an attorney who specializes in this arena, to see if there’s any way around that tax bill.

    I’ve used Scottsdale Law Group and another agent in our mutual office uses Thomson Law.

  9. I love tax guy #3. And your willingness to explain why you are doing this. You are among so many in our country who are going through this. I appreciate your tenacity and transparency.

  10. Sorry to hear you guys are having to do this, but makes no sense to carry that burden when it’s tough enough raising a family and making ends meet. Great that you shared, great info and will be putting tax guy number 3 in my roladex too.

  11. Tax implications suck, but when you compare it on paper to the 15 years of paying just to get back to even when properties only go up 3% a year… it is usually no contest

  12. Here is a link to the Debt Forgivness act

    http://www.irs.gov/individuals/article/0,,id=179414,00.html

    Key things to note:

    If you cashed out during a refinance that money is not covered in the debt cancelation:
    Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?
    Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681.

    You have to pay income taxes on an investment property:
    Can I exclude debt forgiven on my second home, credit card or car loans?
    Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion. See Publication 4681 for further details.

    Hope this helps.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Facebook comments: