By Ilyce Glink and Samuel J. Tamkin
Q: We are trying to do a short sale, but it will not close until 2014. Nothing has been said about whether the Mortgage Forgiveness Debt Relief Act will be extended. I am planning as if it won't be extended, which will result in a large tax bill for 2014. Is it possible to deed the home that we are selling to an LLC and, when the home sells, claim a loss for the company?
In that example, for federal income tax purposes, the lender has forgiven $80,000 of debt that you otherwise needed to pay back and the IRS treats that cancelation of debt as income. Due to the Great Recession, Congress passed a law that allowed homeowners to dispose of their homes without also having to pay the IRS for that canceled debt.
Not all homeowners are eligible for under this law. If you own a second home or investment home, refinanced your primary residence to buy a car, or used refinance funds for expenses unrelated to the improvement of the home, you may be out of luck.
If you qualify under the provisions of the law, your short sale, deed-in-lieu or other arrangement under which the lender waives the repayment of a loan balance must be agreed to and concluded by the end of 2013. If your closing happens in 2014, you run the risk of closing after the law expires.
You posed a second question as to whether you can transfer title of your home into a limited liability company (LLC) and later sell the home at a loss and use that loss to offset the tax you might have on the release of indebtedness.
It would seem that the sole purpose of the conveyance of the home to the LLC is for the tax loss. We don't think the IRS would be inclined to see a "business purpose" in the transfer where the actual purpose is to create tax losses.
You're right to prepare for the issue, but you might want to talk to an accountant about your tax situation well before thinking about transferring title to an LLC. You also need to keep in mind that some lenders will frown on having the transfer occur and that transfer could potentially derail your attempt to sell the home through a short sale.
(Ilyce Glink is the creator of an 18-part webinar and ebook series called "The Intentional Investor: How to be wildly successful in real estate," as well as the author of many books on real estate. She also hosts the "Real Estate Minute," on her YouTube.com/expertrealestatetips channel. If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11a-1p EST. Contact Ilyce and Sam through her website, http://www.thinkglink.com.)
(c) 2013 ILYCE R. GLINK AND SAMUEL J. TAMKIN. DISTRIBUTED BY TRIBUNE CONTENT AGENCY, LLC.