Dallas Short Sale – How is the Seller’s Credit Affected?

Sellers going through a Dallas short sale will take as big a hit on their credit score as when going through foreclosure.  See the correlation below:

Foreclosure
Sellers will take a hit of between 200 to 300 points, depending on the overall condition of credit of their credit. Short Sale
The effect of a short sale (assuming that the sellers are more than 60 days late) on a seller’s credit report is the same as that of a foreclosure.  

Waiting Before Buying Another Home

Foreclosure or Deed-in-Lieu of Foreclosure
A seller who wants to buy another home after a foreclosure will need to wait 24 to 72 months before a lender will consider making another loan to them. Short Sale
Some agents say the good news for short sale sellers is the wait is much shorter before buying another home, and new Fannie Mae guidelines make that a true statement.

Short Sale / Foreclosure Deficiency Judgments

The bad news is that a Dallas Real Estate seller could be subject to a deficiency judgment for the difference between the loan amount and the amount paid. In general, a foreclosure sale wipes out the right to a deficiency.  Some states have laws regarding personal guarantees, which could also result in a deficiency judgment, if the home owner is held personally liable for loan repayment.

If you’re a seller trying to decide whether to let a home go through a Dallas Foreclosure versus attempting a short sale, salvaging your credit may not be an advantage to doing a short sale, if you’ve fallen behind in your payments. There is no credit score advantage for a delinquent borrower on a short sale over a foreclosure.” The only advantage is being able to buy another home within two years over the three- to five-year period required for foreclosures.  You may want to consult a Dallas Realtor or seek legal and tax advice before making that decision.

Tax Reduction Affected by Cost Segregation

Tax reduction is just one of the benefits of cost segregation. Many real estate owners and tax preparers believe cost segregation simply defers payment of taxes. While they recognize it effectively generates an interest-free loan from the government, they do not understand it also provides tax reductions in most cases.

For most real estate owners (corporations are the exception) income is characterized as either ordinary income or capital gains income. It is not intuitive, but cost segregation changes the character of income from ordinary income to capital gains income providing tax reductions of up to 20%. This occurs because the additional depreciation is a tax deduction that reduces ordinary income. When the property is sold, it is recognized as capital gains income. Having more tax deductions increases tax reduction.

Since a portion of the cost basis is allocated to short-life improvements, some owners and tax preparers express concern that the depreciation will be recaptured when the property is sold (at a tax rate of 25-35%).

When a property is sold, the owner and the tax preparer typically collectively review the sales price and depreciation schedule to allocate the sales price between land, short life property, long life property, and profit. After reviewing the condition of short-life property, it is usually determined the value is similar to the depreciated basis (book basis). Hence the depreciation is not recaptured since there is no gain upon sale.

This is reasonable and appropriate since the short-life property depreciates more rapidly than the structure of the building. Short-life property includes items such as carpet, vinyl tile, paving, and parking lot striping. These items do physically depreciate from use and weather (if outdoors).

The capital gains rate (maximum of 15%) is less than half the ordinary income tax rate (maximum of 35%). By converting the character of income from ordinary income to capital gains income, cost segregation identifies tax reductions by reducing the reduces tax rate by over 50% (for income shielded by cost segregation). In addition, cost segregation defers payment of taxes from the year it is earned until the year the property is sold.

Cost segregation produces tax deductions and reduces federal income taxes across the country and in every size market. Below are just a few examples of where cost segregation generates meaningful tax deductions.

City:

Atlanta, GA
New York, NY
Memphis, TN
Miami, FL
Orlando, FL
New Orleans, LA
Hartford, CT
Dallas/Ft. Worth, TX
Washington, DC
Denver, CO
Akron, OH
Buffalo, NY
Jacksonville, TN
Chicago, IL
Toledo, OH
Harrisburg, PA
Birmingham, AL
Augusta, GA
Lakeland, FL
San Antonio, TX
Jackson, MS
Little Rock, AR
Pittsburg, PA
Sarasota, FL
Chattanooga, TN
Manchester, NH
Youngstown, OH
Riverside, CA
Syracuse, NY
Wichita, KS

Cost segregation produces tax deductions for virtually all property types.

Property Type:

Manufacturing/processing
Tennis club
Retirement home
Auto service garage
Mini-warehouse
Single-tenant retail
Medical facility
Hotel
Retail
Vacant land

Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.

Industry:

Mineral product manufacturing
Electronic and appliance stores
Frozen food manufacturing
Nondurable good wholesalers
Furniture manufacturing
Food manufacturing
Chemical manufacturing
Automotive repair facilities
Amusement parks
Leather product manufacturing

O’Connor & Associates is a national provider of commercial real estate consulting services including cost segregation, due diligence, federal tax reduction, renovation upgrading cost analyses, tax return review and apartment inspections.