Don’t Do This When Releasing Equity

In the current economic environment, there are many homeowners who would like to sell their home in order to pay off some of their debt and generate extra cash. However, before you start searching for a buyer, it is important to be aware of potential mistakes that could end up costing you money or time.

Many homeowners think that they can avoid paying taxes on the equity sold from their home by selling it through a “sale-leaseback.” In reality, many of these agreements end up being classified as a gift to the buyer. The result is that not only do you pay taxes on your gain, but also on any potential loss if you are unable to sell or rent out your property for its appraised value.

The IRS provides an exception when there is no money exchanged and neither party will be living in either house at the same time. This type of transaction should only occur with someone who has been approved by the IRS for this specific type of lease agreement where one side gets temporary use of the other person’s residence during some portion of the year.

One mistake that some homeowners make is to not know the market value of their home when they are looking for a buyer. Many factors determine what your house will sell for and it is important to get an educated opinion from someone who understands these prices before you list on the open market.

Also, be sure to know your financing before you start looking for a buyer. If you have an FHA loan, VA loan or USDA Rural Development mortgage and the proceeds of your sale are less than what is owed on the home, then it may be possible to release part of that equity through refinancing rather than selling all at once.