Vokshori Law Group | Short Sale

If you owe more than your home is currently worth and are looking to sell, a short sale may be a good option. This is a decision that you should only make after discussing your particular situation with your Attorney, in order to ensure you are doing the right thing for your financial future. During a short sale in California, you can sell your home to a buyer who is willing to pay less than the current mortgage amount that you owe. You will then give all the proceeds of the sale directly to the lender – fully satisfying your debt.

Our real estate Attorneys can help you decide if short sale would be a better option than bankruptcy or foreclosure , and can assist buyers understand the pitfalls and benefits of purchasing short sale properties.

Tax issues
Before you put your home on the market for a short sale, talk with a tax advisor about possible tax repercussions. The IRS may consider the difference between the value at which you sell your home and the mortgage balance as "income" on which you have to pay taxes. But keep in mind the new laws that have been enacted to exclude forgiven qualified principal residence indebtedness from Federal and California gross income “phantom income”.

The Mortgage Forgiveness Debt Relief Act (“MFDRA”) generally allows taxpayers to exclude income from the discharge of debt on their principal residence. This applies to debt forgiven from 2007 through 2012 and up to $2mm of forgiven debts is eligible for this exclusion so long as the debt was used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes (so this wouldn’t apply to loan proceeds from a refinance used to pay of credit cards or something other than your home).

With non-recourse loans, or purchase money loans, because the lenders only recourse is to repossess the property, there is no cancellation of debt income after a foreclosure (whereas, MFDRA applies to both purchase money loans and refinance or HELOC loans).

In California, the Conformity Act of 2010 helped bring the California tax exclusion a little closer to MFDRA. The Act provides that up to $800,000 in qualified indebtedness can be excluded if the cancellation event occurred from 2009 through 2012. Again, this applies to debt on a principal residence that was used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes (so this wouldn’t apply to loan proceeds from a refinance used to pay of credit cards or something other than your home).

But if the cancellation event occurred between 2007 and 2009, the filer would only be able to exclude up to $250,000 from state taxable income.

Therefore, a CA borrower selling his home in a short sale or losing it to foreclosure would usually be exempt from federal income tax liability on the amount of cancelled debt but may have tax liability to the State. Cancelled debt in a foreclosure would be Loan Value minus the Fair Market Value of the home at the time of the sale. This is something that the lender will calculate and issue a year-end statement to the borrower.

Insolvency is an exclusion to forgiven debt. You are insolvent when your total liabilities exceed your total assets.

Los Angeles Main Office
1010 Wilshire Boulevard Suite 1404,
Los Angeles, CA 90017,
Tel: 213-986-4323 | Fax: 310-881-6996

San Jose Office
1999 South Bascom Ave. Suite 700,
San Jose, CA 95008,
Tel: 408-484-1044 | Fax: 310-881-6996

Sacramento Office
9245 Laguna Springs Drive Suite 200,
Sacramento, CA 95758,
Tel: 916-290-9690 | Fax: 310-881-6996

Orange County Office
575 Anton Blvd. Suite 300,
Costa Mesa, CA 92626,
Tel: 714-644-8281 | Fax: 310-881-6996

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