Selling you home in a short sale: Is a short sale worth it? A short sale can affect your credit, but you get a break from the IRS in 2013.

Q: Our daughter and son-in-law are looking into using a company that sells new homes but agrees to lease your current residence for six months.

My daughter has asked us for advice. I’ve read nothing but bad reviews about this company and although it is ultimately their decision, we think it’s a bad idea to go with this company.

The house they live in now is owned by our son in law, purchased prior to meeting our daughter. He bought the property with a first-time home buyers $8,000 tax break. It is well past the time he had to own the home so he can sell without a penalty.

The neighborhood they are in has numerous foreclosures and he owes about $104,000 on the property but the houses in the neighborhood are selling for around $80,000. They do not want to stay in this area as they want to have a baby and not raise it in this neighborhood.

What do you know about this company and what would you suggest? We’ve also conveyed the idea that “if it’s too good to be true” then it’s a bad decision.

A: There are a number of companies that do what you are describing. We aren’t directly familiar with the company you named in your email (which we removed prior to publication), although they have received national press that is both positive and negative.

The point is, if you’ve read nothing but bad reviews, it doesn’t sound promising. Your daughter and son-in-law should look into selling this property in a short sale, and walking away. If they have the cash, they will probably have to kick in something, or pay off the loan in full.

While this seems like a bad idea, or at least an expensive one, in reality it’s best not to live in an area that seems unsafe or is inappropriate somehow, and where home values don’t have a chance of improving over the next two years. The truth is, if there are a lot of foreclosures it could take your kids 10 years to break even in the neighborhood, and that wouldn’t be helpful. Certainly, paying the bills for six months would be just a drop in the bucket, especially if the property can’t be rented and your kids would be stuck paying two mortgages.

Your children should look for an agent who has a track record of successful foreclosure sales with their current lender. Or, if it seems undoable to sell, then look into renting the property to hopefully cover all or most of their costs.

Completing a short sale will affect their credit negatively, unless they figure out a way to pay off the loan in full. And, it may mean a delay in purchasing a new home (unless they purchase first and then try to sell). But if your children wait until 2014 to do a short sale, there could be changes in the tax code that could be costly.

But moving to a new home they feel comfortable in to raise a family is equally important – even if that new home is a rental property.

In normal times (other than during the Great Recession, and its aftermath), the IRS would treat the difference between what your daughter and her husband owe on their mortgage and the amount that they receive after the home sale (also known as a deficiency) as income and tax it at your marginal tax rate even if you didn’t get a penny from the home. Under current tax code, the IRS is ignoring the deficiency. So there is no additional federal income tax due. But it’s unclear whether this change in IRS tax code will be extended beyond the end of 2013.

If your children unload their house this year, they’ll be protected. Otherwise, there could be a hefty tax penalty to pay.

While the IRS tax code should be considered, it’s only one of a number of factors that will play into the decision on what to do next. But we advise them to talk with a real estate attorney and their tax preparer to get a full understanding of the financial ramifications of each option they have.

Good luck.

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