A friend in trouble

[kagster]

A long time friend just called me about his problem. He took out a loan from his first house and bought a second house for $450K but took out a loan for $515K.

Rented out through Section 8 for $1,600/month but owe $3,500/month on it. His first mortgage is $2,900/month. So total mortage for both houses = $6,400/month. He’s currently using some of the equity he took out to cover the mortgages.

Now the renter isn’t paying the rent and he’s trying to evict them but they’re staying put. He’s still trying to get proper paperwork for the police to evict them.

He’s put the house on the market for $530K and i told him that he’ll unlikely get a buyer for that price and he agreed.

Questions:

If he goes into foreclosure or short sells, what is the tax consequences he’ll have with the IRS?

Thanks,

[PerryChase]

What is Section 8?

Look at the “walking on your mortgage thread.” I asked pretty much the same question.

[powayseller]

YOu’ve really got to talk with a CPA to discuss his personal situation, since depreciation, capital gains, his tax rate, etc. all make a difference. The CPA should know about short sales too. Try Michael Gallon, CPA, in El Cajon 619-440-4780. BTW, Michael has no idea that I’ve been referring him on piggington, and I have no benefit from doing so. Call someone else if you want, but as far as I know, we don’t have any tax experts on this forum. (nor construction workers, loan officers, title/escrow personnel, inspectors, etc.)

[(former)FormerSanDiegan]

Kagster – If I understand correctly, the buyer purchased the rental property using a loan from their primary residence. Did they also take an additional loan out on the rental property.

Can you clarify how much loan is on each property ?

This is an important point. The bank only cares about the loan attached to the property being sold. If your friend took a second loan on their primary residence (e.g. for the downpayment) than that loan is not considered in the short-sale or foreclosure discussion for the rental property.

I’m not a CPA or related, but have purchased and sold rental properties and have studied the tax consequences.

[Chrispy]

Section 8 is part of HUD – basically, low-income tenants get a subsidy from the government to cover their housing. When you advertise a rental as “section 8 OK” it means you are willing to do the paperwork necessary to get this thing rolling.

Lots of people will not take Section 8 tenants because of the low-income stigma, also because when the government gets involved, you know what happens. However, I have heard it is better to have a Section 8 tenant because you know you will get paid. Eventually.

[PerryChase]

Chrispy, if i rent to a section 8 tennant, do I have to take a lower rental rate?

[kagster]

FormerSanDiegan,

I’m sorry but i don’t he clearly stated everything to me. All he said was that he took equity out of the first and I asked “and bought the second with it?” and he said yes. And he owes $515K on the second, but he said he only bought it for $450K. Which doesn’t make sense.

I guess he took equity immediately on the 2nd and used the 1st equity on something else.

[Chrispy]

Good question (which means I don’t know the answer for sure) – but I think the government will reimburse up to a certain amount of rent, so most people look for rentals that match the government’s payment (which is minimal).

I used to sell ads for the Reader and some of the rental ads had Section 8 wording. They were, for the most part, in the low-income part of town. It takes two-three years to get approved for Section 8 housing on the part of the tenants – not an easy process. Only those who truly need it end up getting it. Most people find a job before their approval comes in and thus, are no longer eligible.

[lindismith]

What was he thinking when the mortgage price is $3500, and the rent is only $1600?
Did you ask him this? If so, what did he say?

[(former)FormerSanDiegan]

kagster – Sounds like he cashed out an additional $65 K to handle carrying costs, paying of credit cards, fixing up the property or buying stuff.

I can’t offer any more info without knowing which properties the loans are on. However, there is a lot of related discussion in the thread that PerryChase pointed out.

Good Luck

[no_such_reality]

Pc, no, you don’t take a lower rate. In fact, you justify your rate based on identifying three comparable homes in the area that renting. The HUD representative validates the rentals and comparable-ness. And authorizes the rate.

So basically, you get fair market rent and the Government guarentees it. The people in the program don’t want to lose it, so they are going to pay their part. Which is limited to 30% of their income. The Section 8 program makes up the different between their 30% of income payment and whatever your FMR is up to 120% of the HUD determine FMR for bedroom count in area.

For example, Say the family renting the OP’s house makes $18,000 a year. Their income is $1500/month. The max contribution from them is $500/month.

The landlord will get a $500 check from the family and a $1300 check from the government.

do you think the family is going to find a way to get the $500 and not bother you too much? I think so.

http://www.hud.gov/offices/cpd/homeless/library/sro/finalguidepdf.pdf

[Wickedheart]

Your friend needs to get a lawyer that specializes in evictions. Even with a good lawyer it can take 6 months or more to evict a bad tenant, especially if they are experienced in working the system. The law is on their side. Good luck.

I expect that there a quite a few FB’s who are going to get a painful lesson on the joys of being a landlord……………….

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