Short Sales Help Ease Duplex Investor Taxes

Duplex Short Sale Tax ConsequencesThe Minneapolis duplex market still has many owners facing foreclosure.

I do everything I can to track down as many of these property owners as possible so I can help them explore alternatives to losing the property through foreclosure.

After all, a foreclosure can cause more than just damage to credit. In fact, it can not only impact things like employability and security clearance, but may also be a taxable event for a real estate investor.

And yes, even if the duplex is owner occupied, the portion occupied by tenants is considered an investment property, and may trigger a tax obligation.

I don’t know whether it’s due to a sense of defeat or depression, but I am always surprised by how few duplex owners are willing to explore their options.

First, while the odds are long, in the last three months I have spoken with two duplex owners (both owner occupants) who have succeeded in getting loan modifications. While they seem to be the exception to the rule, places like the Minnesota Home Ownership Center can help property owners through the process.

Second, in Minnesota, if a duplex is sold at the sheriff’s sale for less than the amount owed to the bank, the property owner has the right to purchase the property back at that adjusted amount priot to the end of the six month redemption period.

The duplex owner may also sell the property for that amount or more and pocket the difference (provided there isn’t a second mortgage on the property).

Finally, there is the short sale option. If the duplex is too far along in the foreclosure process, this may not be as beneficial to the owner’s credit score as it is early in the process. This is largely as a result of the impact of additional late payments.

Nonetheless, not only does a short sale drop off a credit report much more quickly than a foreclosure, it also tends to result in a higher sales price for the duplex owner.

According toRealty Trac Senior Vice President Rick Sharga, the average sales price for a short sale in 2010 was 16 percent higher than an REO.

In other words, if a distressed property happens to be owned by an investor, the short sale reduced their potential tax obligation by 16 percent.

 To me, that’s quite a savings.