Can You Short Sale an Investment Property?

New strategies to avoid a pending foreclosure are being implemented by property owners across the country. While regular homeowners can struggle with paying a mortgage payment, the owner of a financed investment property can be in a similar position. Someone asking can you short sale an investment property in the U.S. will likely find this content useful.

The Short Sale Defined 

When a bank or lender agrees to take a loss on a property in exchange for the deed, a short sale has been enacted. This legal maneuver is one option available for property owners who face foreclosure or other financial issues. While this type of sale can be effective, there are many reasons that a deal could fall through leaving a property owner liable for the entire loss. It some cases, it is possible to short sale a rental property.

Short Sale for Insolvency 

When a person is unable to pay a mortgage, a lender usually has the legal right to begin procedures for a foreclosure. A rental home short sale will only be approved if a person is deemed insolvent. Proof of annual income, the original sale price of the investment property, all current debts and additional expenses are usually required for review by a mortgage lender. This helps the lender prove that a person is no longer able to pay for the property and could expedite the short sale approval.

Bank Approval is Needed 

A person who has financed a home that is used as an investment property most often has a mortgage on the property. The type of loan that was originated will likely determine the type of approval that is needed by a lender before a short sale. Some real estate investment loans are non-recourse types that are guaranteed by financial institutions.

This loan type means that even during a short sale a property owner has less of a chance of being sued for the loss that is undertaken during a foreclosure. There are many lenders that only offer loans with a recourse clause to ensure that their investment is not lost when someone cannot pay off the mortgage.

Tax Consequences are Common 

While a person might be approved for a rental home short sale, there can be payable taxes that are due during the tax year when the sale to a lender took place. An IRS form 1099-C is a debt forgiveness form that is not always sent automatically by a lender. It is up to a person going through a short sale to keep track of what forms must be filed at tax time and if all tax payments are made. A 1099-C would also apply to a vacation home used for rentals throughout the course of a year.