A distressed sale is a sale of assets that takes place due to urgency on the part of the owner. In many situations, this type of sale takes place because the owner of the assets needs immediate cash flow to cover debts that are pressing. The type of assets involved may be personal property, real estate, or even securities. In many cases, the distressed sale does generate enough cash to cover the immediate needs, but tends to mean a loss to the owner.
One of the most common examples of a distressed sale involves the emergency sale of real estate. The sale may be due to the inability of the owner to continue making mortgage payments. A sale of this type may also take place as a means of selling property as part of a divorce settlement. In both scenarios, the focus is on selling the property for enough to settle the current mortgage loan, and not on realizing any of the equity that has accumulated over the years. As a result, the owner or owners may have little to nothing to show from the sale once the mortgage is settled in full.
A distressed sale may also involve various types of securities, such as stocks or bonds. The urgent need to sell may be brought about due to a margin call that leaves the investor short of available cash. When this happens, the securities can be sold to generate enough money to allow the investor to cover the margin. As with the distressed sale of real estate, there is a good chance that the investor will have little to nothing left over after meeting the margin call.
While normally associated with situations where financial distress is evident, a distressed sale may also focus on the execution of a bargain sale to a charitable organization. In this situation, the idea is to sell an asset to a charity at a price that is well below the market value. In return, the seller receives a tax deduction, owing to the loss. Tax agencies in many nations have specific regulations that govern this type of transaction, and the amount of tax breaks that can be achieved as a result. For this reason, individuals seeking to generate some sort of tax deduction should look closely at the tax laws that apply in their home country before attempting to utilize the distressed sale model, and make sure the allowances currently in place are worth the time and effort.
