Short Sale Information and Favorable Laws for California Homeowners in 2014
Here are the short sale related laws in 2014 to find out if you do or do not have to pay the tax after a short sale in California. Also learn about how lenders are prevented from coming after California homeowners and rental property owners after a short sale. Please seek the advice of both tax and legal professionals on how these short sale laws apply to your specific situation. For a free consultation on the short sale process, please fill out the contact information request below. We are here to help you along with a team of experienced short sale agents in your area who can guide you through the short sale process.
Do you have to pay tax after a short sale in California?
The good news in 2014 is that the California Franchise Tax Board has clarified with the Department of Treasury that California families who successfully complete a short sale on their primary home may not be subject to California state income tax liability on debt forgiveness “phantom income” they never received in a short sale as long as they meet several conditions such as:
√ Short sale is on a primary residence
√ The property is located in California
√ The property is 1-4 units
√ The loan on the home is a non-recourse loan*
√ The loan is a purchase money loan
It is important to ask your CPA regarding the tax consequences of a short sale. Please also seek legal advice on the consequences of a short sale given your specific situation.
*A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default.
Are You a Rental Property Owner? Learn more information on short sale on a rental property or converted rental property here, or please be sure to send us a message below.
Do you have to pay the IRS tax after a short sale?
Cancellation of Debt income resulting from a short sale is not always taxable according to the IRS.
There are some exceptions that you can claim to avoid the tax resulting from a short sale according to the IRS. The most common situations when cancellation of debt income on is not taxed by the IRS include:
- Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners which expired in 2013.
- Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
- Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets. With the insolvency exclusion, you may be able to exclude the canceled debt income after a short sale of a primary residence or rental property to the extent that you were insolvent immediately before the cancellation of debt.
- Certain farm debts
- Non-recourse loans
Was the Mortgage Debt Relief Forgiveness Act extended in 2014 ?
As of this writing, the Mortgage Debt Relief Forgiveness Act has not been extended. However, please be sure to read the above paragraph on this article to see if despite the Mortgage Debt Relief Forgiveness Act not being extended in 2014, many homeowners may not have to pay California state income taxes on a short sale assuming they qualify. Also, note that not all cancellation of debt income resulting from a short sale are taxable by the IRS. Read below for more information. Please consult a CPA to see how this may or may not apply with your individual tax situation. If you have a rental property that you are considering to short sale, please send us a message below for more information.
What is the Mortgage Forgiveness Debt Relief Act of 2007? It generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, short sale, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. The Mortgage Forgiveness Debt Relief Act of 2007 applies to original or refinanced loans that were used to acquire, build, or improve upon on your primary home.
If the loans forgiven were loans that you used to purchase the home (purchase money loan) or loans used to build or improve the home, most likely you would not have to pay taxes if you complete a short sale before December 31, 2013. Note that a portion or all of the forgiven amount would be considered taxable income if the forgiven amount, or if portions of the loans forgiven were used for other purposes- i.e. cash out refinance used to payoff i.e. car loans, credit card debt, etc.
Be sure to fill out the contact information request to get your questions answered on short sale in California. You may also call us at 760-798-9024.
There is HOPE for California homeowners to not have to pay tax after a short sale in California
If the Mortgage Debt Relief Forgiveness Act is not extended in 2014 and you do not qualify to exclude the cancellation of debt (COD) income resulting from a short sale, you may want to ask your CPA or tax advisor regarding exceptions on paying taxes on cancellation of debt income after a short sale based on your insolvency status. You may be able to avoid in paying taxes after selling your home in a short sale if the sum of all your debts and liabilities exceed your assets.
How do you know if you are insolvent? According to the IRS, “you are insolvent when your total debts exceed the total fair market value of all of your assets. Assets include everything you own, i.e. your car, house, condominium, furniture, life insurance policies, stocks, other investments, or your pension and other retirement accounts. Debts include your liabilities such as first mortgage, second mortgage, car loans, credit cards, etc.”
√ Keep Your Home California offers homeowners up to $5,000 in transition assistance after a short sale subject to eligibility and funds availability.
Investment Property or Rental Property Financial Relocation Assistance Programs after a Short Sale
√ For those who own an investment or rental property in California, the Home Affordable Foreclosure Alternative HAFA also provides up to $3,000 in relocation assistance.
Some lenders also have their own version of relocation assistance after a short sale. Please send us a message below to learn about your short sale options.
Short Sale Process Explained
How to Short Sale Video
Checklist of things to do before initiating a short sale:
Note, you have to hire an experienced short sale real estate agent to help sell your home in a short sale. You never have to pay for short sale commissions as it is paid from the proceeds of the sale of the home with the short sale lender’s approval.
California Short Sale Related Laws
Homeowners’ protection from deficiency judgments on First Mortgage and Second Mortgage Short Sales
SB 931 Protection from Liability after a short sale on a First Mortgage in California
SB 931- Did you know that when the first mortgage holder of your loan accepts full payment and satisfaction of all your outstanding first loan from the successful completion of the sale of your home in California, your lender is is prevented from pursuing a deficiency against you even after a short sale. This is great news!
What this means to you as a homeowner in California is that this releases you from further liability (deficiency) when the bank accepts and approves the completed short sale. Click here to read more information on SB 931 and see how this may apply to your individual situation. At any rate, whenever you are negotiating a short sale, it would still be beneficial to have your short sale real estate agent specialist ask for the lender to issue a short sale approval letter with the verbiage indicating a waiver of future deficiency and no promissory note. Also read more about the favorable law Code of Civil Procedure 580-e here.
SB 458 Protection from Liability after a short sale on a Second Mortgage in California
SB 458 Effective as of July 15, 2011, California homeowners who sell their homes through a short sale and who have subordinate loans such as home equity line of credit (HELOC) or second mortgages, are now extended the protection against deficiency in a short sale. This means that if your second mortgage lender agrees to the short sale, your lender must accept the proceeds from the short sale as a payment in full of the outstanding balance of the loans. So if you are a homeowner in California who sells your home in a short sale that the bank has approved, you will be released from liability (deficiency) not only on your first mortgage (SB 931) but also on your second mortgage under SB 458 in the event that the bank accepts and approves the short sale event. Receiving short sale approval is not enough, you would have to complete the short sale. Click here to read more information on SB 458. Please consult a real estate attorney to see how these short sale related laws may apply to your individual situation. Did you know that some homeowners may only need to do a short sale on their second mortgage if there is enough proceeds from the sale of the home to payoff the first mortgage? Please send us a message below for more information.
Read more information on frequently asked questions on short sales here.
Why California homeowners short sell their houses
|Top reasons for short sales||Situations leading to short sale||A few deciding factors|
|√ Divorce√ Illness in the family√ Job loss or reduced income from business√ Relocation due to job/ personal reasons√ Tenant related problems, vacancy, or property needed major repairs||√ Upside down mortgage on home or rental property√ Behind on mortgage payments or expect to be delinquent√ Declined loan modification or loan modification is still not working√ Payment shock: Interest only loan converts to principal and interest loan||√ Get a fresh start.√ Credit impact: Short sale is better than foreclosure.√ Favorable short sale tax and anti-deficienly laws in place.√ Finally get rid of problem property/ unsustainable mortgage.|
Did you know you can buy a house again after a short sale ?
Are you looking for a way to minimize damage to your credit and avoid foreclosure?
Typically when deciding to do a short sale, a few things that you may want to consider are the deficiency and tax consequences of selling your home at a price less than what you owe your lenders.
The goods news is that in 2014, if you decide to do a short sale, there are a few favorable laws that you should know about that are currently in effect. But, the clock is ticking especially if you are already behind on your payments or expect difficulty making payments. So the time to act is now if you wish to complete the short sale process on your home.
What to expect in a short sale process
- Most short sale lenders will require you to use a professional real estate agent to assist you in completing a short sale.
- There is zero out of pocket money for you to hire experienced short sale agents as the lender pays commissions out of the proceeds of the sale.
- Be sure to ask us about possibly qualifying for up to $3,000 to $5,000 in relocation assistance after your short sale.
- Short sales take time. We have all heard the horror stories about short sales taking months on end to close. But, that has not been our experience. We’ve found that when documents are managed properly, and consistent communication with the lenders is performed, that short sales can be completed in a very reasonable time frame.
- Always seek out the guidance of an experienced professional real estate team when considering a short sale.We have the experience to clearly explain your options to guide you in the right direction, and get your home sold so that you can get a fresh start. Read the Testimonials from our clients describing their experience with us.
- If you would like to have a similar experience with your Short Sale Listing Agent Team, just contact us by filling out the simple form above and we will contact you for a complimentary and no-obligation consultation. Whether a short sale is or not the right option for you, we’ll be the first to let you.
Short Sales completed in 2013: Additional Information
The federal Mortgage Forgiveness Debt Relief Act only provides for the exclusion of Cancellation of Debt (COD) income relating to qualified principal residence. If you have COD income as the result of a foreclosure on other property, such as a second (vacation) home, rental, or other business property, you may still be able to exclude COD income under other provisions.In California, homeowners who sell their home through a short sale may qualify for the California Mortgage Forgiveness Debt Relief under SB 401, which was enacted on April 12, 2010. (Please also read the 2014 update above with the FTB clarifying when a short sale forgiveness of debt is not considered taxable income.) The CA Mortgage Forgiveness Debt Relief Act expired in 2013.
Read more about this from the California Franchise Tax Board website under SB 401. The California Tax Relief limits the amount of qualified principal indebtedness up to $800,000 for those who file as married, joint, head of household and up to $400,000 for those who file as married/RDP filing separately. See State of California Franchise Tax Board for more details. In order to claim tax relief, your would need to file Form 540 or Form 540X for a previously filed tax return.
2013 Update on State of California Short Sale Mortgage Debt Relief Forgiveness: SB 30 Taxation: Cancellation of Indebtedness: Mortgage Debt Forgiveness in California. This bill if passed would have extended the operation of the exclusion of the discharge of qualified principal residence indebtedness to debt that is discharged on or after January 1, 2013, and before January 1, 2014.
Consult your tax advisor regarding how this tax relief may apply to your individual situation.
Did you know that our short sale agent specialist has earned the nationally recognized Short Sales and Foreclosure Resource certification. The National Association of REALTORS® offers the SFR® certification to REALTORS® who want to help both buyers and sellers navigate these complicated transactions, as demand for agents with short sales expertise grows. Please contact us at 760-798-9024 for a confidential and free consultation or by filling out the contact information request below for more informationion to find out if short sale is the right option for you in 2014.
Research Short Sale Tax Laws and Information
- California Franchise Tax Board Tax News: Foreclosures and Mortgage Forgiveness Relief
- IRS Department of Treasury Letter to Senator Boxer: Would a California homeowner have taxable cancellation of indebtedness income on a lender approved short sale that qualifies under section 580e of the California Code of Civil Procedure (CCP)?
- Code of Civil Procedure Section 577-582.5
- State of California Franchise Tax Board News:Short Sales and Cancellation of Debt
- The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
- SB 458: Protection from deficiencies on Short Sales in California with second mortgages
- SB 931: Protection from deficiencies on Short Sales in California with first mortgages.
- Click here to read more information on the Mortgage Forgiveness Debt Relief Act of 2007
- Learn how to short sale a house in California here. Read more information on frequently asked questions on short sales here.
- Click here to find out how long is the wait to buy a house after a short sale.
Most California homeowners can now avoid foreclosure or bankruptcy and complete a short sale instead in 2014. Even with the Mortgage Debt Relief Forgiveness Act’s expiration, there may not be a taxable event as a result of short sale with a loss, due to the IRS recognizing that the debt written off in a short sale does not constitute recourse debt under California law, and thus does not create so-called “cancellation of debt” income to the underwater California home seller for federal income tax purposes. This means that you may be able to short sale your primary home in California in 2014 and not incur both state and federal income tax for completing a short sale on non-recourse, purchase money loans.
Testimonials from clients we worked with on Recent short sales:
After sitting down with one real estate agent who introduced the idea of a short sale, web searches on short sales and selling condos in Vista were done which lead to agents Jean and Ken Tritle. Initially the thought was to get a second opinion to further solidify the decision to move forward with a short sale with the first agent. After meeting with Jean and Ken and experiencing their professionalism, initiative, wealth of knowledge, and pure passion they have for real estate, it was known that both short sale was the way to go and that Jean and Ken were the best agents to help with that process. As the process went on, they provided knowledge about what the process entailed, explained terminology in an understandable fashion, were very respectful and responsive to questions/comments/concerns and made the short sale process as comfortable for us as possible. While the personal interaction with Jean and Ken was first class, their attention to details, promptness in responses with financial institutions, HUD, buyers was excellent. If you are someone that wants to get something done in the real estate market, either buying or selling, go with Jean & Ken Tritle. – Lorenzo, V., North County San Diego, September 2012
Jean and Ken did an amazing job selling our home, and were highly recommended by our friends. The entire process took nearly three months to complete, but their diligence, professionalism and support never faltered. In comparison to other real estate teams I have worked with, Jean and Ken truly raise the standards within the industry. – Michael S., San Elijo Hills, San Marcos, CA, April 2012
Realtor agent Jean Noriega-tritle is very deserving in all aspects of this review. A proven realty professional in her field. My property was sold in the least amount of time. Avel L., American Canyon, CA., January 2011
Last year, I was looking online on information about short selling my home. Ken and Jean Tritle’s advertising were linked with what I was reading. I gave them a call, left a message and within a few hours they returned my phone call. They answered all my questions I had about short selling and the process it takes.
I felt comfortable about having them sell my home. After a few days, they sent me an email on surrounding homes that were sold. As soon as I gave the go ahead and filled out the paper work, Ken and Jean scheduled an appointment quickly for photos to be taken of my home, a walk through for them to describe the home when they put it up on the listing. They scheduled an open house for one day and received many families that were interested to buy the home. After 1 week, they told me they received over 12 offers. I was really impressed. Throughout the whole process, they kept in contact to keep me up to date what was going on. Because it was a short sale, my lenders took a long time to approve the sale. They kept at it and trying to push it through so we can close. As long as you do your part in getting all the paperwork that is required, they will keep things moving. I like doing business with them because they took care of all my needs in a timely manner, answered all my questions I had, listened to my concerns and got the job done. I highly recommend using them for all your housing needs. They won’t let you down!! Maida, San Diego, February 2014
Related Short Sale Articles
- Short Sale- Frequently Asked Questions by home sellers in California
- Help for California Homeowners in Avoiding Foreclosure
- How to do a Short Sale?
- What are the effects or consequences of a short sale?
- Buying a house after a short sale
- California Foreclosure Timeline Explanation
- Tax Relief for Homeowners
- Short Sale Agents in San Diego County Homeowners
- Short Sale Information Videos to Watch