Challenges for Real Estate Investors In This Declining Home Value Market

Some losers in this residential real estate declining market are buyers of second homes, investors who are now involved with income tax debt challenge.

Some of these people will lose their properties through short sale or foreclosure and make it to bankruptcy under the weight of a income tax bill.

While U.S. Congress has granted some tax relief to people who lose their primary homes, there is no such aid for investors who fall behind on payments on 2nd homes.

If a person buys an investment home, and it they are unable to make payments and forced to short sale that property, or if they lose it in foreclosure, the difference between the amount they borrowed and the rental home’s sale price in short sale or foreclosure will ultimately be considered by the IRS to be taxable income as forgiven debt.

Under the U.S. Mortgage Forgiveness Debt Relief Act, which is effective from Jan. 1, 2007, through Dec. 31, 2009, a homeowner does not have to pay ioncome tax on debt forgiven by a lender, as long as the loan is backed by the property the homeowner lives in.

According to the National Association of Realtors, there are about 7.5 million vacation homes in the country, about 10 percent of the number of owner-occupied homes. From 2002 to 2007, the number of vacation homes rose 18 percent, more than three times the growth in the number of owner-occupied homes and the growth in investor-owned units.

For investment property owners with a potential income tax bill, there is one possible way to minimize the damage. Negotiating with a lender could prove to be good. The lender needs to agree that foreclosure fully satisfies all obligations under the loan. With that statement, there could possibly be no outstanding unpaid debt reported by the bank that the Internal Revenue Service could treat as income. However, it is still unknown whether that tactic will work with the IRS and the US tax courts.

Posted by Harrison K. Long, Explore Properties Group, June 6, 2008
Source: California Association of Realtors, National Assoc. of Realtors