Condo Condolences

2008-06-17 by

Today TaxMama hears from Melissa in Florida with this problem. “I paid a deposit and rate lock fee on a pre-construction condo on the Miami River in Oct 04. Closing is due in June 2008. I really cannot afford to buy this condo and make monthly mortgage payments. What is best? If I do not close and lose my deposit and rate lock fee, can I write them off as a loss? Or if I close on this condo and it sells at a loss, what will I be able to write off?”

Dear Melissa,

Just curious. Why did you buy a condo, knowing the payments (since you have a rate lock) that you can’t afford?

Well, I have bad news for you.

1) There is no write off for losses on the sale of personal homes.

2) If you lose your deposit, since it’s for a personal home, I don’t see any write-offs, for the loss of the deposit.

3) Worst news of all, if you don’t complete the sale, will you be obligated for the loan at all? How will this affect your credit?

On the other hand, since you’ve never moved in, you might be able to justify this as an investment loss. In that case, you’ll be able to write off the loss on Schedule D. You’ll be able to use $3,000 per year, in excess of any capital gains you might have – until the loss is all used up.

The only problem with that scenario is, to get the mortgage for the house, you’ve already declared that the mortgage is for a home loan – not an investment.

Personally, I’d be doing some in-depth research into all the pros and cons in the few days you have left.

Is there any chance you can sell the unit before your closing deadline for your current purchase price? Probably not. I’d also bet that you’re not the only one in this position. If the unit is now worth less than your contracted purchase price, can you negotiate the price down? Speak with an attorney who might be prepared to represent other buyers, too.

Otherwise, can you afford the place if you had a roommate?

You had 4 years to deal with this. The market has been terrible for over a year. And, now, at the last minute, you’re looking for a way out?

Worst case, you’ve learned an expensive lesson. But it won’t break you, since you’ve already spent the money years ago.

And remember, you can find answers to all kinds of questions about bad investments and other tax issues, free. Where? Where else? At TaxMama.com

[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the subscribe link and join us.]

Download the MP3 (0:00min, 1MB) or listen now...

Ask TaxMama
Where taxes are fun and answers are free
www.TaxQuips.com
The number ONE free tax podcast online
http://southflorida.bizjournals.com
Recommended by Forrest Davis EA
www.condovultures.com
Recommended by Forrest Davis EA
Forrest Davis, EA
http://www.davis-tax.com in Arizona

# | Posted in Tax Quips | Comments » (3)



All Comments RSS

  1. Blakely Sanford Says:
    June 17th, 2008 at 09:15 am

    Sometimes speculators get burned.

  2. Forrest Davis EA Says:
    June 17th, 2008 at 10:25 am

    Alright, Tax Mama has done the tough love, but my heart

    goes out to Melissa.

    In the overheated market of 2004-05, it was easy to feel

    panicky about buying "before prices go up more." Yes, now

    it's easy to have 20-20 hindsight, but at the time many

    people were doing the best they could to not be left in the

    economic dust and presumably never be able to afford a

    house.

    I, too, could say, "What were you thinking, buying a place

    that wouldn't even be built for four years, when you can't

    know what either your job situation or the real estate

    market will be like that far down the road?" But I won't.

    There's lots of blame already being tossed around, towards

    the government, lenders, greedy investors and confused

    buyers. Now, with a collapsing housing market threatening

    our economy even more drastically than real estate did in

    1986 (say "S&L"), we need to look for how to handle the

    present situation, both nationally and individually.

    Melissa, you're going to lose money here—you know that.

    Tax consequences won't make up for that, but might soften

    the blow slightly.

    The first issue is intent. Was this intended as a primary

    residence, or as an investment? Somehow, I have a hard

    time envisioning a 4-year build time as shelter principally
    —have you slept under a bridge for four years, waiting

    for this place? Do you already own a place so this would

    become a second property? Do you live and work in the

    area, or would it not make sense for your job to live in

    the condo?

    Eva also pointed out the matter of what you put on the

    mortgage application: was the condo described as

    owner-occupied or not? It is a factor about intent, but I

    wouldn't consider it controlling. Owner-occupied status

    would keep you from vacation home (part rental) status if

    it wasn't your primary residence. There's also the matter

    of situations changing since you filled out the application

    4 years ago … and you might not have even done a loan app

    at the time, since it would be too outdated by closing time

    to meet underwriting criteria.

    Assuming you can get past the intent issue and consider the

    condo as an investment, then you can write off the losses

    whether you close on it or not.

    Something else you should realize: even if you wanted to

    close on the condo, you might not be able to because of the

    appraisal. With Miami condos down 30%-40% from 2005, no

    appraiser is going to give a 2008 valuation equal to 2004

    list prices, and in turn the lender (with government

    regulators looking hawkishly over their shoulder) probably

    couldn't extend you a loan for the original amount. If the

    appraisal came in for, say $300,000 now where the 2004

    purchase price was $500,000, you would have to come up with

    an extra $200,000 cash to close under the contract. Look

    closely at the cancellation clause; usually, if you can't

    qualify for a loan as stipulated in the orginal agreement,

    the contract can be cancelled.

    With FL condo developers reeling from massive fallouts in

    years-old purchase commitments, renegotiating the purchase

    price is clearly an option, but you do need good local help

    to do that. You should be reading

    http://southflorida.bizjournals.com and

    www.condovultures.com for background.

  3. Frank W Webster, EA Says:
    June 20th, 2008 at 08:29 am

    If Melissa contracted for the condo as an investment intending to flip it for profit, (she never could have afforded it), and she doesn’t go to closing, the deposit is a schedule A investment loss. It’s not a capital loss since she never owed the condo and the contract specifies the retention of the deposit as liquidation charges. I’m just finishing an audit on a 1040X that I did for a client for $35,000.

Google Custom Search