Short Sale, Short Answer

Dear Ms. Lank: What exactly is a "short sale" and what are the pros and cons? -- D.A.

Answer: When a homeowner is hard up and needs to sell but owes more than the place is worth, sometimes the lender will agree to a short sale. The lender will take whatever the property brings in the open market and record the mortgage as settled, so the sale can go through. For the lender, it is sometimes less expensive than foreclosing and then trying to re-sell the property.

This allows the homeowner to be free of the house, and it's somewhat easier on a credit record than a foreclosure would be. The disadvantages are that paperwork and negotiations with the lender can be frustrating and time-consuming (at least according to the mail I receive). And sometimes the lender doesn't just forgive the rest of the debt but instead seeks a judgment against the ex-homeowner.

Profit On The Condo

Ms. Lank: In 2004 we purchased a condo in Florida. We have rented it over the years and have also spent time in it ourselves.

We are about ready to sell this property. We were told recently by the IRS that we need to live in the property for five years instead of two years before we sell, in order to not pay capital gains tax. Apparently the law changed from the time of our purchase. My husband asked about a grandfather clause and they said that there wasn't any in the new law. Is this accurate?

What if we gifted this property to our five children? Would they then have to pay tax on the gains if they chose to sell the property? -- F. and E.P.

Answer: It's a refreshing change, these days, to hear from someone who expects a profit on the sale of a Florida condo.

First question: Yes, there are new rules about rental property later converted to your own main home. It must be your own residence for five years before you could qualify for the home seller's tax break. That's in contrast to the usual two years.

Second question: If you give property away, the recipients take over your cost basis along with the property. When the kids sold, they'd owe about the same tax you would, so that's no use.

One really great tax avoidance strategy is to die. Your heirs would get the property with a new "stepped-up" cost basis, value at the time of death. But you may not want to do that. Continued...