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Short Sales and Related Topics

What is a Short Sale?

A short sale is when the bank/lender accepts less then what the borrower actually owes on the property. In other words, it is when a property is sold for less then what is owed and the bank/lender must approve the sale.  Any unpaid balance, after the short sale is approved, owed to the bank/lender is known as a deficiency. In addition, the property owner must show a hardship or give reason why they no longer can make payments. An experienced real estate agent will be able to assist with this process.

There may be tax ramifications to a Short Sale but every situation is unique. You may have heard, “Don’t do a short sale because you will get a 1099 and have to pay taxes on the difference between what you owed on your home and what you sold it for or the amount the bank wrote off.” This may be true, but this is not the whole story.

If you borrow money from a lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender.

When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

The thing that most people don’t know or don’t tell you is that with a Foreclosure, you will also get a 1099. In the case of a Foreclosure the 1099 is called a “1099-A”  and the ‘A’ stands for “Acquisition or Abandonment of Secured Property”. It is important to know that while there are many differences, the tax consequences for the ‘C’ and the ‘A’ are the same. Because of The Mortgage Debt Relief Act of 2007 you may not even be required to pay taxes on the ‘income’ as shown on the 1099-C. However, you shouldn’t just assume that you won’t have to pay. While we are very good at successfully closing Short Sales, we are not tax experts.

Before making your final decision on a short sale, first consult a CPA or Tax Preparer.
Below you will find information on helpful laws for those considering a short sale within California.

Short Sale Laws That Favor California Home Sellers

SB 931 Deficiency Waiver on First Mortgage

SB 458 Second Mortgages - Release of Liability after completing a short sale in California - Deficiency Waiver on Second Mortgage

Mortgage Forgiveness Debt Relief Act of 2007

Mortgage Forgiveness Debt Relief Act of 2007 - NOW EXTENDED TILL December 31, 2013

SB 401 - California Mortgage Forgiveness Debt Relief - Expired December 31, 2012

SB 30 - Taxation: Cancellation of Indebtedness: Mortgage Debt Forgiveness - Has not passed as of 2/13/13

Home Affordable Foreclosure Alternative (HAFA) Program

The Home Affordable Foreclosure Alternative (HAFA) Program took effect on April 5, 2010 in hopes to entice lenders to opt for a short sale rather than settle for a foreclosure. HAFA short sale incentives benefit all three parties involved in the short sale process; the Investor, the Borrower and the Servicer.

  • Borrowers receive up to $3,000 in cash at closing.
  • Loan Servicers receive $1,500 after the successful conclusion of a short sale.
  • Investors receive a maximum of $2,000 for signing off on overheads to second position lien holders. Also, investors receive $1 for every $3 spent to release junior liens; up to 6% with a maximum of $6,000.
  • In order to qualify for HAFA, borrowers must already meet the central eligibility criteria for the HAMP modification program.
  • The Property must be the Homeowner’s primary residence.
  • The loan must be the first mortgage on the premises.
  • The homeowner must be delinquent in payments or can anticipate nonpayment in the near future.
  • The unsettled balance cannot exceed $729,750.00.
  • May be surpassed in some cases for two to four unit dwellings.
  • The borrower’s monthly mortgage payment must be more than 31% of the homeowner’s gross income.
Why Short Sale Your Property?

  • Stay in home while the short sale takes place.
  • Get out from a mortgage payment on an underwater asset.
  • Save your credit from a Foreclosure on your record.
  • Have a chance of your lender paying you upon Short Sale completion.
  • Walk away debt free.
  • Approved Short Sales lender cannot pursue the home owner for a deficiency (SB458).
  • Property owner doesn't pay anything to real estate agent processing short sale - lender pays short sale fees
  • Get a fresh start!

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