Recently updated on February 11th, 2023 at 02:17 pm
What You Will Read In This Article
If you’re selling a house, you understandably want to make a profit, but sometimes the market isn’t on the seller’s side. While it might be tempting to hang on to the property and sell it when the market’s better, that’s not always possible.
You might need to sell the house as soon as you can because you’re moving out of the state or maybe even the country. You might have invested too much money into renovating the home and won’t be able to recoup those funds.
There are many reasons that hanging on to a house isn’t feasible or isn’t worth the hassle. When considered alongside foreclosure or bankruptcy, selling at a loss isn’t the worst option.
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If you owe more on your mortgage than you can get by selling your house, you’ll have to consider the best option. Is it worth selling for a loss and trying to pay off the difference? This situation could get you into more financial trouble, as you might have to sell some of your belongings or take out loans to pay off the mortgage in full.
Should you stay in your home and continue to pay the mortgage until the house regains its worth? If you don’t have to move immediately, you could see if your lender would refinance your mortgage to make it more affordable in the meantime. If you do need to move immediately, you might want to look into a short sale.
What is a Short Sale?
A short sale is when you sell your property for less than the mortgage. All of the money from the sale goes to the bank to try and pay off your house. Depending on the lender, they may forgive the remaining money that you still owe, or they’ll issue you a deficiency judgment that requires you to pay back the difference.
Since your lender has to sign off on this sale, you’ll know upfront if you have to pay back the remainder. You can ask the lender for a waiver of deficiency, which means they won’t sue you for the rest of the money. Make sure to get this document in writing!
You’ll want to make a convincing case to your lender that your financial problems are new and weren’t in effect when you bought the house. If you recently lost a job or paid off medical debt, they’ll consider this when granting you a short sale.
A short sale is a better option than a foreclosure because it is not as bad for your credit. If you go through a foreclosure, you have to wait at least two years to buy more property, and the foreclosure stays on your credit report for seven years. People who sell their house through a short sale are usually able to buy a new house immediately.
Equity is the difference in market value for your home and what you owe your mortgage lender. If your house is worth $300,000 and you sell it for that, but only owed $250,000 on the mortgage, you’d have a profit of $50,000. If you sold the same house for $200,000, you’d still owe $50,000 to the lender.
Even if you sold your house at a $50,000 profit, you’d have so many real estate fees to pay that you wouldn’t pocket close to that amount. Losing equity isn’t as big of a deal as it may seem and only factors in when you look at it on paper.
People often think about taxes they’ll have to pay when buying a home, but they rarely consider taxes they’ll pay when they sell their home. When selling your house, it’s essential to know about capital gains taxes and how cost basis can help offset that expense.
Unfortunately, there aren’t any tax benefits to taking a loss on your primary residence. You won’t have to pay taxes on any profits, but you also won’t get any special treatment for losing money. There are tax benefits for taking a loss on investment property, though, which you’ll read about soon.
Capital Gains Tax
Capital gains tax is applied when you sell your house for more than you paid for it. The IRS will tax any profit you make at a capital gains rate. Long-term capital gains taxes have rates based on income, while short-term capital gains are taxed as regular income.
A property is classified as your primary residence if you’ve lived there for two of the past five years. You can sell your primary residence without paying capital gains tax on the first $250,000 profit if you’re single or $500,000 if you’re married.
Cost basis is an important factor when you’re calculating capital gains. It can give you a break on your taxable amount. Cost basis includes the price you paid for the property along with fees, like:
- Title fees
- Legal fees
- Filing fees
- Survey fees
- Transfer or stamp taxes
You cannot include expenses such as:
- Moving expenses
- Mortgage insurance
- Credit report fees
- Appraisal charges
Another way to add to your cost basis is to make improvements to the home. The IRS defines these expenses as improvements that add value to the property, such as:
- Additions that increase square footage
- Interior improvements like a kitchen renovation or new appliances
- Landscaping that adds value, like walkways or swimming pools
- Exterior improvements like new siding or a new roof
- Upgrading systems like heating, air conditioning, or a security system
- Improving the plumbing or installing a new water heater
Regular upkeep doesn’t factor into your cost basis. For example, if your water heater breaks and you have to call for repairs, the cost of that service isn’t something you can add to the cost basis. You had to repair the water heater to keep the house livable.
If you bought a new water heater seven years ago, that expense would count towards your cost basis. However, if you buy a new one before listing your house on the market, you can only apply the price of the newest water heater to the cost basis—not both of them.
While you’ll be paying money for these improvements as you implement them, you’ll get a tax break later. The higher your cost basis, the lower capital gains tax you’ll have when you sell the house.
This means if you buy a house for $100,000 and sell it for $200,000, you won’t have an obvious profit of $100,000. You’ll factor in all your initial fees plus home improvements, which might bring you to $125,000 as your cost basis. This means, for tax purposes, your profit from the sale is $75,000.
If you’re selling your house at a loss, you don’t have to worry about capital gains tax. Unfortunately, you’re also not able to deduct the debt from your primary residence like you could if it was an investment property.
Investment Property Differences
If you’re going to rent out your home until the market is better, you should be aware that this changes the property’s classification to “investment property.” If you sell your investment property at a loss, you can deduct $3,000 of the lost amount from your income taxes. Any remaining capital loss rolls over to future income taxes.
Depreciation recapture tax is something you’ll want to know about before using your home as a rental property. Think of how you can write off business expenses, like a computer, as a deduction on your income tax. Your computer loses value over the years, so the initial deduction is a nice benefit.
Real estate, in theory, never loses value as long as it is still habitable. After classifying your home as an investment property, you can deduct upkeep related to the house, like mortgage insurance, property taxes, and repairs.
When you sell the rental, you’ll have to pay some of this money back. Depreciation recapture tax is how the IRS taxes your profit on selling this “business” that has been making you money. If you sell the investment property at a loss, you can use that to lower your tax liability for the year or carry it forward for future taxes.How Can I Sell My House Using ISoldMyHouse.com? Learn more.
Alternatives To Selling a House at a Loss
If you don’t want to sell your house at a loss, consider some other options that might eventually let you break even or make a profit.
Wait It Out
If you don’t have to sell your house to use the money to buy your next property, consider waiting out the market. The real estate market ebbs and flows, sometimes being a better time to buy and sometimes a better time to sell.
If it seems like the housing market is trending upward, you might want to try to wait and see if you can sell your house high enough to break even or make a profit. If it seems like the market is steadily declining, it might be best to sell now before things get even worse.
There are also certain times when it is easier to sell a house, like in the summer before school starts and rarely over the winter holidays. If it’s possible to stay in your house, for the time being, you could wait it out. Or, if you need to move, it might be worth installing a security system and keeping insurance on the vacant property while you wait to sell it.
Convert to a Rental Property
If you need to sell your house because you’re moving away, consider renting the property out until the housing market is better. You can price the rent to cover the mortgage payments and have the resident pay utilities or charge enough to make the monthly cost include everything. Keep in mind that rental income will count on your income taxes, so the money isn’t all profit.
Converting your home into a rental property means it will be considered an investment property, which means it will have capital gains associated with it, much like stocks or other financial investments.
Find Ways to Sell and Save on Real Estate Commissions
If you find that selling your house at a loss is the best option, there are ways you can try to save on real estate commissions. Listing your house yourself, using a flat fee MLS, or negotiating discounts with realtors are all ways to cut costs when you’re trying to sell your property.
FSBO means you’ll be listing your house as a For Sale By Owner. Using FSBO means you won’t have to hire a realtor or pay them any fees at closing. You’ll have to do all of the legwork yourself, like marketing the property, scheduling showings, and leading the tours.
If you list your house on sites such as this one (ISoldMyHouse.com), you’ll reach a wider audience, and you can also buy yard signs and sales brochures from the site.
Flat Fee MLS
If you list your house on ISoldMyHouse.com with our Flat Fee MLS option you’ll get your property listed in your local Multiple Listing Service (MLS), as well as on every real estate site that pulls MLS records. You’ll get all of the cost-saving benefits of selling your house yourself, with more exposure. You’ll pay the website an affordable flat fee instead of giving an agent a percentage of the sale price.
Negotiate Discounts On Agent Fees
Real estate agents take a percentage of your property’s sale price, but it doesn’t have to be a set amount. You can negotiate with your realtor to try and get a smaller fee taken out. Some realtors won’t want to do this because it means they’re getting paid less for the work they’re doing and don’t want to be considered a discount agent such as a 1% or a flat fee broker. But some are determined to sell your house and will take a lower rate to get the contract.
If you think your house will be a quick sale, it’s worth trying to negotiate fees because the realtor won’t have to put in much work. Also, remember that listing with FSBO or Flat Fee MLS costs less because you’re doing the work yourself. If you’re willing to spruce up the house on your own, do that before negotiating, so the agent sees that you’re doing your part.
If you haven’t purchased your next residence, tell your listing agent that you’ll also buy through them. This will make them more willing to lower their fees because they know they’ll be getting more business from you. Using a new realtor will also increase your chances of getting a lower fee because they want the experience of the sale.
After learning many different aspects of selling your home at a loss, you’ll be able to navigate this situation in the best way for your lifestyle and finances.