Maybe you do and maybe you don’t follow the impact of your statement. If you do, great. If not, for yours… and the benefit of others, lets explore the “claiming insolvency” comment.
What it sounds like to me is… you are planning on is claiming insolvency (assets worth less than the assets) according to IRS Publ 982. Great, that will eliviate any tax consequences from the forgivness of debt, if that occurs. But, what if the lender pursues a judgment against you…? Claiming insolvency doesn’t cut it there. The only way to deal with that is Ch 7 Bk, which is liquidation. Means you are going to hand over all property and equity to a receiver, aka Bk Trustee. Of course it depends somewhat on which state you live in, and you may or may not have posted that; if so I don’t recall.
My point here is IT MAY BE MORE COMPLEX than just CLAIMING INSOLVENCY… The implications can be disasterous, and it also sounds as if you have the financial where-with-all to continue paying the debt, and if that is true then I would recommend you continue to do so… but still negotiate with the lender for a soft landing. Some lenders will allow a give-back or DIL with a voluntarty note for the balance… no terms, just a note out there that maybe you pay someday, maybe you don’t.
Like many other investors, I too bought in this area of Florida. I purchased a duplex back in 2003 and regrettably held on to it, watching it peak and then come crashing down. I purchased it for 220k, watched it go up to about 300k and now it’s worth about 70k. Actually, I’ve seen some of these duplexes go for 35- 50k. I use to rent each half for $950 and now it’s a struggle to find a tenant that will rent it for $400. Every single duplex on the street is in foreclosure and they are all abandoned, my property is the last one standing. Many of the duplexes have been taken over by squatters and those that haven’t, have been stripped of their appliances and other various items. I’ve been told that the police don’t even touch this area anymore.
My last tenant just skipped out because they found the same unit on a different street with no security deposit and $200 a month rent. It’s cost prohibitive to rent the place â?? advertising, utilities and management fees run around $300 a month. It takes about 5 months to find a tenant and then I have to choose between the prospective tenant with 2 felonies or the other one with 3 felonies. After all that, the tenant usually skips for cheaper rent and then I have to make it rent ready for a cost of around $600.
I ran my numbers and it cost me more to rent it last year then if I had boarded it up and let it sit â?? the monthly PITI is 2k. So what do you do with it? Should I walk like the rest of the investors that left the street dark or keep crossing my fingers that it doesn’t get stripped of every appliance in the middle of the night. If I’m lucky it might return to $220k in 15 â?? 20 years and in the meantime I’ll burn through a few hundred thousand keeping it going until then.
What would you do:
No bank will short this from 220k to 70k â?? I’ll at least call but I’m also realistic
I’ve heard no one say they’ve had luck with a Deed in Lieu or Principal Reduction
L/O is out of the question â?? no renters, no buyers
It will take at least 10 years to get back to a rental rate of $950 a side
I will never be able to compete rent wise against any investor that picks up one of these for dirt cheap
I could hedge my loss by picking up a couple of these dirt cheap â?? but in an area that is turning into a war zone, I can’t stomach it.
Should I stand my ground, keep throwing 2k a month at it until it turns profitable in 20 years? Or do what the rest of the investors in the area did, chalk it up to a bad asset and walk from it. I know it’s my responsibility and obligation to keep paying for this, but again, what would YOU do?
I think you should walk away. but before you do that,
should think through some possible consequences and see
if you can mitigate against them. The one I would be
most worried, is if the lender forgives the loan and
send you and IRS a 1099, and then IRS comes after you
for a tax bill on the forgiven debt as ordinary income.
the recent income tax changes made forgiven mortgage
not taxable, but I think only for principle residence.
So, check with some CPA or tax lawyer to see if there
is any way to prevent this or reduce the tax bill
Your question is too general to provide a precise answer to… it depends greatly on the rest of your financial (asset and income) picture. FL is a state that will grant a deficiency judgment for a loss to a lender. So the lender could come after you for the difference of what they sell the unit for and what you owe, plus costs… So if you are in an asset position that the lender is going to collect the funds either way, then you need to find a solution other than walking. If not, then the good money after bad story gains more traction.
AS you mention, it may be 20 yrs before you got even again… that mkt is hurt so badly that it will be a long time recovering. Good luck.
Thanks for the advice. I can claim insolvency if it ever comes to that point, I have a couple of homes with positive equity and then a few with negative. At this point I am at a crossroads of either throwing a couple thousand at it every month for a very long time or taking my chances that the bank may not file a deficiency - either way it’s a lose / lose so I need to decide between the lesser of two evils. The lender is USAA.