When you first bought your house, you most likely never imagined a scenario where you'd have to sell your home at a loss. Rather, you assumed when the time came, you would sell your house well over asking price, and take home a nice chunk of change to put towards a new home.
However, whether the circumstances call for you to move immediately for a job, to make more room for a growing family, or get out of a housing market that simply turned south, you may have to adjust to the new reality of selling your home at a loss.
Sure, it's not the most ideal position to be in, but you still have a few moves left to make the most out of a regrettable situation. To help you know what your options are and how you can best take advantage, here are five situations you should consider about taking a loss on the sale of your house.
1. Turning Your Home Into a Rental
Before you put your home on the market, consider if turning your home into a rental property would benefit you financially. Instead of selling your home at a loss, you can rent it out generating a passive income helping to keep you in the black until you have enough equity in your home to sell.
This option requires a bit of number crunching — you'll want to calculate the cost of your monthly mortgage payment, taxes, insurance, funds for repairs and major home emergencies, as well as a management fee if you hire a property manager to look after the home.
If your market allows you to charge high enough rent to cover all these costs plus a little extra, renting out your property can be a smart investment that will help you pay for a new mortgage in another home.
Keep in mind, you'll want to account for potential stretches of time you'll have vacancies where you must cover rent and all other expenses yourself. Plus, by turning your home into a rental property your taxes and insurance can change, possibly increasing.
2. The Tax Benefits
Typically, you won't see any tax benefits from taking a loss on the sale of your house, unless you meet one of two criteria. The first is if you've turned your home into a rental property, and the second is if you've used your home for a business purpose, e.g. a home office.
If your home is either a rental property or used as a home office, you'll be able to deduct the loss on the sale. But before you get too excited, you'll only be able to deduct the loss from the market value of your home at the time you converted your home into a rental property.
This means your deduction may not be as high as you'd like. For instance, if your home's value was initially $300,000 when you purchased the home but dropped to $200,000 when you decided to turn it into a rental property, you'll only see deductions if your home sells below $200,000.
And unfortunately, the IRS traditionally needs to see that you've used the home as a rental property or home office for at least a year and have proof that someone has actually rented it and hasn't remained vacant.
3. Possibility of Short Sale
If you're completely underwater on your home loan and the market value of your home has seen better days, a short sale is an option. A short sale is a home sale in which the lender will accept less than the amount still owed on the mortgage.
So instead of the seller taking the profits, the lender receives any and all gains from the sale to forgive the seller of any debt. However, you'll only want to consider this option if you're struggling with your mortgage payments, as a short sale greatly impacts your credit score as well as your ability to apply for loans or buy a home in the future.
4. Waiting It Out
While some life events are out of your control like a natural disaster or irreparable home damage calling for you to sell your home and move immediately, if you don't have to sell your home this instance, you can benefit from a little patience.
By waiting it out, you'll give the housing market the time to possibly swing back in your favor. You'll definitely want to consult with your real estate agent, who knows your market best, to see if home prices and values will rise within the next three to six months and if it's in your best interest to wait, or if selling now means the best deal.
If it makes sense to wait out the market, in the interim you can go directly to your lender and renegotiate your loan to reduce monthly payments or even the principal.
5. The Emotional Toll
The last thing you need to know is that you simply may have to take the loss — no rental property opportunities or tax benefits, just less money than your home's worth. In this case, you'll want to prepare both emotionally and financially.
It can be tough to accept a loss on your home after all the memories and hard work you've done on improvements to make your house feel like a home. Know that selling at a loss isn't the end of the world and is probably the best decision you can make in the moment.
Financially, you'll want to plan out what you can afford after a loss. You may not jump on that next dream home you had in mind. Instead, you may have to downsize, consider renting, or dip into your emergency savings.
Work with an Experienced Real Estate Agent
Taking a loss on the sale of your home is never easy. But, you can mitigate some of the damage by working with an experienced, local real estate agent who knows your market well and will work to get you the best price possible even under the less-than-stellar circumstances.
And by working with Clever, you'll be connected with a top-rated Partner Agent who not only will help you navigate the entire selling process using their years of expertise, but Clever Partner Agents also provide even more cost-saving opportunities.
Your experienced Partner Agent works for a flat fee of $3,000 or 1% if your home sells over $350,000, saving you thousands on commissions that you can put towards a new down payment or moving costs helping to negate selling your home at a loss. Contact Clever to be put in touch with a Partner Agent and sell your home at the highest price possible.