This article was posted on the front page of Yahoo News today and it’s another perfect example of how much misinformation there is in the market place.  We see daily different articles, websites, etc. that are giving people the incorrect information regarding real estate, short sales and foreclosure.

In today’s article, the author covered the topic of foreclosure and strategically walking away from a property. The first part of this article I don’t like is that they only discuss walking away from a property and don’t explain what options are available for someone that finds themselves in that position.

What really bothers me though is the incorrect information.  In the section regarding “issues to keep in mind”, this was item #2:

2. Location, location, location. Each state has its own rules and regulations regarding foreclosures, which affect both the length of the process and what you could be liable for in the end. In so-called ‘non-recourse’ states like Arizona, California and Texas, a lender cannot come after you for any deficiency (for instance, if your mortgage was $300,000 and they’re only able to sell the property for $200,000). In other states they can pursue the difference, in theory – which is why some homeowners opt to file for bankruptcy, to free themselves from those potential obligations as well.

The section that is underlined is NOT CORRECT and if someone read this article and didn’t know better, it could put them in a very bad financial situation.  ONLY original purchase money loans are non-recourse in California.  If a person has refinanced their loan(s), they become “recourse” and the lender CAN come after you for the remaining balance.

This is why it is so important to work with a proven professional. If you are facing foreclosure or have any questions regarding a short sale and the foreclosure process, please do not hesitate to contact our team. We specialize in San Diego Short Sales, Orange County Short Sales and Riverside Short Sales.

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The Act is set to expire at the end of this year (December 31, 2012). This means that if anyone wishes to take advantage of the benefits of this Act, they must complete their modification, short sale or foreclosure on or before Dec 31, 2011.

Matt Alegi, a partner with the Potomac law firm Shulman Rogers and chair of the firm’s residential real estate practice group, says the tax break has meant a savings in the tens of thousands of dollars for individuals.  Typically, if someone were to have $150,000 forgiven by the bank, Alegi says, “you just made another $150,000 of income for tax purposes in that year.”  So, say someone makes $50,000 but had $150,000 forgiven by the bank, that person is now paying taxes on a

200,000 income, and included in a much higher tax bracket.  The loss of the relief will plunge homeowners further into debt, Alegi says.

Alegi also believes that the upcoming expiration of the Debt Forgiveness Act will have an impact on short sales.  Any homeowner considering a short sale should make a push to complete it this year in order to take advantage of the tax breaks. 

We believe that there will be strong lobbying to extend the tax break.  If it isn’t extended, it could result in very serious tax consequences for many homeowners.

To take advantage of the Debt Relief Act, you need to fall under very specific guidelines outlined by the IRS.  For example, the debt forgiven is only for primary residences and the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.  And please remember, this is only provided in general terms. If you are considering a short sale or foreclosure, please make sure to contact your tax consultant or CPA to further explore the possible tax consequences. If you do not have someone, make sure to contact us and we will put you in touch with a

If you are facing foreclosure or have any questions regarding a short sale and the foreclosure process, please do not hesitate to contact our team. We specialize in San Diego Short Sales, Orange County Short Sales and Riverside Short Sales.

This program was introduced statewide in 2010, yet very few Realtors® are aware of it.  The program was started by Wells Fargo after they aquired both Wachovia and World Savings bank.  They determined that it makes more sense financially for everybody involved to create a streamlined program to facilitate market value sales on loans that were issued by Wachovia, World Savings, and Golden West.  These loans were acquired at a discount, so they can afford to write these loans off of their books.

We have built a strong relationship with a manager of Wachovia, which allows us to move the files through even quicker than the standard processing times.  If you are considering a short sale, please don’t hesitate to contact us and find out how we can assist you. 

Some of the key differences with the Wachovia Short Sale include:

- No Hardship letter is required.

- Tax returns and paystubs are not required.

- Wachovia is committed to a 7 Day approval process.

- The “Fast Track” program provides for pre-approved short sales which allow the property to be sold for a higher price and in a quicker time frame.

- This program also offers possible “Cash for Cooperation” of up to $5,000.

- Home owner does not need to be late on their mortgage payments.

- Credit report will reflect “settled for less than owed”.

- Wachovia deficiencies will be forgiven.

Contact us today to learn more about this program!

Wachovia (Wells Fargo)
866-642-8608
General Information: 866-642-9405
Fax: 866-260-3962
LM Dept: 877-213-7063
Home Equity Short Sale Dept: 877-455-6091
Home Equity Short Sale Dept Fax: 866-729-9592
HAFA Phone: 800-922-4684
HAFA Fax: 866-359-7363

If you are facing foreclosure or have any questions regarding a short sale and the foreclosure process, please do not hesitate to contact our team. We specialize in San Diego Short Sales, Orange County Short Sales and Riverside Short Sales.

The overall sales numbers were higher than a year ago, but still more than 20 percent below the average number of transactions for the month. There was a small burst of sales activity in December, but not enough to boost the value of homes in the region.  San Diego has nearly 4 percent more sales when compared with December a year ago, but the average price was down almost 5.5 percent.

“Prices continue to be weak because of the weak job growth and the difficulties a lot of people have getting a loan to buy a home,” said Andrew LaPage of the real estate tracking firm Data Quick. “There’s still an emphasis in the market toward the lower cost distressed properties.”  The median San Diego home price fell just over 5 percent from December a year ago. The average price of sales for December  was $315,000, which is down from $333,000 a year ago.  “We think there’s still a lot of people sitting tight, waiting for something to happen. Either a clear sign that prices have hit bottom. Or the opportunity to qualify for financing,” said LaPage.

Our opinion on it is that there are still a lot of homebuyers waiting on the market to see if there will be further declines.

According to a survey of 109 economists that was released in late December by Zillow, Inc, US housing may fall further under the weight of foreclosures and not rebound until 2013, even as the economy builds momentum and mortgage rates remain at record lows. “Negative equity, unemployment and low consumer confidence remain the key factors delaying a true recovery,” Stan Humphries, Zillow’s chief economist, said in a statement.

Prices will fall 1% in 2012 and rise 2% in 2013, Frank Nothaft, chief economist for mortgage-finance company Freddie Mac, announced in a Dec. 14 report.  “A full-fledged recovery in the housing sector will likely elude the US in 2012, but new construction and home sales are expected to be greater than in 2011,” Nothaft wrote.

More than a quarter of homeowners with a mortgage are “underwater,” or owe more than their property is worth.  Prices may drop an additional 7%, according to Scott Simon, head of the mortgage- and asset-backed securities teams at Pacific Investment Management Co. in Newport Beach, California.

As you can see from the three statements above, there is a consensus that there will be a continued decline, but no one knows for how much longer or how much. This is another reason that we strongly encourage anyone considering a short sale to start the process now and get out of the property before they lose any further equity. If you get out of the property now and begin the rebuilding process, you will still be able to take advantage of the low prices and the bottom of the market in 2 years.

An annual report of foreclosure activity in the US for 2011 found the number of properties subject to default notices, scheduled auctions or bank repossessions dropped 34% from the previous year, according to a RealtyTrac report released today.

California still has an above average percentage of homes with at least one foreclosure filing in 2011. In California, 3.19% of homes had at least one foreclosure filling in 2011. Other states with an above average number include:

Arizona – 4.14%

Georgia – 2.71%

Michigan – 2.21%

Florida – 2.06%

Illinois – 1.95%

Colorado – 1.78%

Idaho – 1.77%

If you are facing foreclosure or have any questions regarding a short sale and the foreclosure process, please do not hesitate to contact our team. We specialize in San Diego Short Sales, Orange County Short Sales and Riverside Short Sales.

Governor Jerry Brown signed into law Senate Bill 458 (SB458) on July 15th, 2011. This bill expands the anti-deficiency protection to all second lien residential mortgages on 1-4 unit properties. The bill prevents second mortgage holders from pursuing a borrower after the closing of a short sale for the remaining balance on a loan. (One important item to note is this does not protect someone who goes through foreclosure.) Junior lenders such as a second or third mortgage, including HELOCs can no longer pursue a deficiency after a short sale.

This bill became effective as soon as it was signed due to the urgency clause placed in the bill.

California Association of Realtors President Beth L. Peerce stated: “SB 458 brings closure and certainty to the short sale process and ensures that once a lender has agreed to accept a short sale payment on a property, all lien holders – those in first position and in junior positions – will consider the outstanding balance as paid in full and the homeowner will not be held responsible for any additional payments on the property.”

Senate Bill 458 is an extension of the current bill (Senate Bill 931) that was signed into effect in October of 2010. SB931 only prohibited the first lien holders from pursuing a deficiency judgment following a short sale.

The new law also bars any short sale lender from requesting or requiring any contribution from the seller. Lenders have had two paths to get sellers to share the deficiency: Recourse after the short sale and Contribution at the short sale closing. January’s SB 931 stopped recourse for first lenders; Friday’s SB 458 stopped recourse for junior lenders and stopped all contribution.

Prior to the signing of Senate Bill 458 (SB458) it was possible for a homeowner to complete a short sale, only to after have the second lender come after them for them for the balance. We heard of countless stories of inexperienced agents leaving their clients responsible after the close. In these cases, the sellers would close on a short sale with the deficiency language in the letter saying the bank had the right to pursue them. This is why it is so important to make sure you have an experienced agent negotiating your short sale. Even with the new laws in place.

It is going to be interesting to see how second lien holders handle short sales with the new bill in place. We have spoken with fellow Realtors and attorneys about the bill and the response is mixed. While we feel the goal of the bill is fantastic, there are concerns as to how this will affect the bank’s position. Lien holder still has absolute authority to decide whether to accept a short sale or not, and is not required to accept a short sale. If the lien holder is no longer able to require a contribution from the seller AND must release their deficiency rights, will they begin forcing more sellers into foreclosure in order to retain their deficiency rights? This is why it is so important to have a strong negotiator on your side when doing a short sale.

SB 458 will amend California Civil Procedure section 580e. [C.C.P. section 580e].

The Big Question With Senate Bill 458 is: Can the Lender Require A Seller To Bring In Funds Over the Sale Price?

As it often is with law, the answer to this question depends upon how you frame the facts. In the bill, the statute specifically prohibits a note holder from requiring additional compensation from the seller:

“A holder of a note shall not require the trustor, mortgagor, or maker of the note to pay any additional compensation, aside from the proceeds of the sale, in exchange for the written consent to the sale.” C.C.P. section 580e(b)

But…

According to CAR, the above provision does not prohibit a homeowner from “voluntarily” offering additional monies to the lender with the hopes that a lender will agree to a short sale. A lender may also negotiate for a contribution from someone other than the borrower, such as other lenders, agents, and relatives.

Speaking with our attorneys, escrow, title and other realtors, we have not been able to get any clarification on this. On the Monday following the signing of SB458, Wells Fargo renegotiated ALL of their California second mortgages that were approved and were requiring the seller to bring in funds. We received the call from all of our negotiators asking for changes to our HUDs so the files could be re-approved.

While the answer to the question is still up in the air, Wells Fargo has taken the position that the seller can no longer contribute any funds. This is big news, since Wells almost always required some form of seller contribution.

Properties That Qualify for Protection under the amendment to C.C.P 580e under SB 458:

This deficiency judgment prohibition applies to a broad category of 1 to 4 residential units with exceptions noted below. It applies to:

•Cash-Out Refinanced loans

•Non-Owner Occupied Homes

•Second Homes

•Vacation Homes

Exceptions to C.C.P. section 580e? (SB 458):

Section 580e does not apply in the following circumstances:

•Where debtor is a corporation, limited liability company, limited partnership, or political subdivision of the state. C.C.P. 580e( d)(1).

•Where debtor engages in fraud in the sale or waste of the property C.C.P. 580e( c).

•A lien secured by a bond as specified; a public utility lien; and additional rules apply if a note is cross-collateralized by more than one property. C.C.P. 580e(d)(2).

•For other exceptions that may apply to your specific factual scenario, speak to a lawyer.

If you are facing foreclosure or have any questions regarding a short sale and the foreclosure process, please do not hesitate to contact our team. We specialize in San Diego Short Sales, Orange County Short Sales and Riverside Short Sales.

Now, if there is a back up offer in place, we are given 14 days to upload the new offer into equator.

You can download their full education guide here:  Bank of America Back Up Offer Guide

If you are a home owner and have a loan or loans with Bank of America and are considering a short sale, please do not hesitate to contact our team.  We have an extensive background and very high success rate with Bank of America short sales.

You can view further information on their short sale process here:  Bank of America Short Sales

And this is the email that was sent out by Bank of America today:

As an example of our commitment to improving the short sale process, Bank of America now allows real estate agents to submit a backup offer on a transaction if the original buyer has walked away from the sale.  This means you will no longer have to initiate a new short sale; instead, you can continue with the original transaction in Equator and still work with your same short sale specialist.  This change will save you time by not having to repeat a number of process steps.

When a Backup Offer Is Ready

You should send a message to your short sale specialist via Equator when the original buyer is no longer interested in the property.  Your short sale specialist will then respond to you within two business days and ask if you have a backup offer ready to submit.  If you have another buyer prepared to make an offer, the short sale can proceed without having to repeat the short sale initiation steps.  The short sale status in Equator will change to “Marketing,” and you will be directed to complete the following tasks within 14 business days:

Complete the “Listing Data” task.

Provide the marketing description.

Review the marketing plan.

Upload the offer.  (To do this in Equator, locate “My Properties,” then “Offers” and select “Place New Offer.”)

If the “Listing Data” task is not completed and the new offer is not uploaded within 14 business days, the file will be closed.

When No Backup Offer Is Ready

This new process applies only if there’s an available backup offer when a buyer walks.  If you do not have a backup offer ready to be submitted, the short sale will be declined.  In that case, you should return to marketing the property and initiate a new short sale in Equator once you receive another offer.

A new educational guide, How and When to Submit a Short Sale Backup Offer, is available to explain the backup offer process.  If you have any questions, please contact your short sale specialist via Equator or call Customer Care at 1.866.880.1232.

Visit the Real Estate Agent Resource Center at bankofamerica.com/realestateagent for additional educational guides, news and resources to help you complete short sales at Bank of America.

If you are facing foreclosure or have any questions regarding a short sale and the foreclosure process, please do not hesitate to contact our team.  We specialize in San Diego Short Sales, Orange County Short Sales and Riverside Short Sales.

Home prices in big metro areas have sunk to their lowest since 2002, the Standard & Poor’s/Case-Shiller 20-city monthly index showed Tuesday, May 30th.  Since the housing bubble burst in 2006, prices have fallen more than they did during the Great Depression.  National prices are now down 32.7% from their peak set five years ago. 

The S&P/Case-Shiller national home price index covers 80% of the housing market.  ”This month’s report is marked by the confirmation of a double-dip in home prices across much of the nation,” said David Blitzer, spokesman for Standard and Poor’s.  The housing market went through a brief recovery period starting in mid-2009, but home prices have fallen below the 2009 housing bust bottom in the first quarter, dropping 4.2% from the prior three months, according to the S&P Case-Shiller national home price index.  The 20-city composite index was at 138.16, falling below the 2009 low of 139.26. 

“Folks are having so much difficulty in getting financing for a home,” said Mark Vitner, senior economist at Wells Fargo. “And foreclosures will likely bring about a third dip.  It may be early next year before prices hit bottom.”  Foreclosures have forced prices down so much that some middle-class neighborhoods have turned into lower-income areas within months.  Homes in foreclosure sell at a 20 percent discount on average, which can hurt prices in the neighborhood, but many foreclosure sales have been delayed while federal regulators, state attorneys general and banks review how those foreclosures were carried out over the past two years.  Once those homes are eventually foreclosed upon, they will cause prices to fall even further.  Those declines are “etched in stone,” said Patrick Newport, U.S. economist at IHS Global Insight. 

Many analysts believe that prices could continue rolling back as the risk of falling prices frightens potential home buyers away from the market.  Although the Great Recession ended in June 2009, economists believe that the weak housing market will continue to be a drag on the recovery for years to come.  The severity of the housing decline is having other broad effects on the economy.  Roughly 92 percent of homeowners say it’s a bad time to sell their home, according to the latest Thomson Reuters/University of Michigan index of consumer sentiment.  And while seeing their home values plunge, many Americans are reluctant to spend money — a drag on an economy that depends on consumer spending. 

Dean Baker, co-director of the Center for Economic and Policy Research, said he expects prices to continue to fall through the rest of the year.  “You are going to see a further negative wealth effect as the price declines from last year,” Baker said. “So that is another source of drag on the economy.”  Others believe that prices are near, if not at, the bottom and that recent improvements in employment will keep things from getting worse.  But keep in mind that during the Great Depression, prices fell 31 percent and it took 19 years for the housing market to regain its losses after the Depression ended.

However, the picture is brighter in Southern California.  In the Los Angeles-Orange County metro area, prices remained 5.4% above its most recent bottom, hit in 2009.  Prices locally are equivalent to those seen in the fall of 2003. Coastal areas, such as San Francisco, San Diego, Los Angeles, Washington and Boston, have fared comparatively better in the past two years.  They have been helped by healthy local economies, desirable city centers and limited space for new housing.  In New York, homes are still 63 percent more expensive than in 2000.

If you are facing foreclosure or have any questions regarding a short sale and the foreclosure process, please do not hesitate to contact our team. We specialize in San Diego Short Sales, Orange County Short Sales and Riverside Short Sales.

10627 Caminito Banyon
San Diego, CA 92131

Sale Price: $203,000
Financing: Cash

1^st lien: Chase
2^nd Lien: N/A

Chase Short Sale Approval Letter

Over $200,000 was written off, the sellers were released of any deficiency rights and they did not have to bring in any money to close.

This short sale was not an easy process.  It took almost a full year (we took the listing in April of 2010) to get this finished.  Because of the condition of the property, it was difficult to get a buyer, yet alone keep one!  On top of that, the BPO came in a lot higher than what any buyer was willing to offer.  We had to constantly go back and forth with comps to show that this was at fair market value.  After a lot of negotiation between the buyers and Chase, we were finally able to reach a price that they both could agree with.

While not an easy process, especially with the sellers living in another state, we’ve learned once again, that persistence and patience pays off.

If you have any questions about Chase short sale or approvals, feel free to contact us! We’re here to help!

 ** We are not tax experts. The information and examples provided below are for informational purposes ONLY. It will serve in a starting point to further investigate how a short sale or foreclosure may effect your taxes. We HIGHLY RECOMMEND that you consult a CPA and tax adviser regarding your tax obligations BEFORE you consider a short sale, deed-in-lieu-of-foreclosure or foreclosure. **

A tax accountant we highly recommend is Dave Ruch of BRN Tax Accounts

One of the top questions we receive from homeowners considering a short sale or foreclosure, is “Will I have to pay taxes after a short sale or foreclosure?”.  This page is to serve as a starting point on gathering information. As stated above, we are not tax experts and cannot provide tax advice.  We have an excellent tax accountant that we highly recommend.  You can view his profile HERE and we highly recommend you contact him or your tax accountant/attorney with any questions regarding taxes.

What are the tax implications of a Short Sale or Foreclosure? When a lender or lenders, agree to a short sale and sell the property for less than the full amount due, the amount of the debt that the lender writes off will be treated as ordinary income for the seller.  In order to write off the debt, the lender(s) will be required to file a 1099C (Cancellation of Debt ).  The 1099C is what the homeowner receives at the end of the year and must report as income. 

Short Sale:

A 1099C will always be received from the first mortgage and will only be received from the second mortgage if they agreed to write off the remaining balance of the loan.

Example 1: Assume you purchased your home for $500,000. When you purchased the home, you took a first and second for a total of $450,000. Circumstances in your life put you in a position that you are no longer able to make the payments and now need to sell your home. Due to the decline in the market, you are only about to sell for $400,000.  Your lender agrees to the transaction, taking less than is owed and forgiving you of the $50,000 loss.

Enter the IRS. When the mortgage company forgives the difference, the IRS considers the $50,000 that was “forgiven” by the lender as “debt relief” income. Your lender will send you a 1099-C in the amount of $50,000 and the IRS will want you to pay taxes at the rates for ordinary income, same as for salary.

Foreclosure: In a foreclosure, the lender will write off the remaining debt owed on the loan in the same manner as a short sale, and the amount of the debt that the lender writes off will be treated as ordinary income for the homeowner.  The lender(s) will be required to file a 1099A (Acquisition or Abandonment of Secured Property), in the case of foreclosure.

In foreclosure, A 1099A will always be received from the first mortgage and will only be received from the second mortgage if they agreed to write off the remaining balance of the loan.

Example 2: Assume you purchase a home for $500,000 and uses it as a personal residence. When you purchased the home, you took a first and second for a total of $450,000. Circumstances in your life put you in a position that you are no longer able to make the payments causing you to default and the lender forecloses on the property. Similar homes at the time sell for $400,000.

Enter the IRS. When the mortgaged property is foreclosed or repossessed, and the bank re-acquires it. The bank sends a Form 1099-A to the owner and the IRS. Using the numbers in the example, the 1099-A indicates the foreclosure bid price ($4000,000), the amount of your debt ($450,000), and whether you were personally liable. Debt cancellation ($50,000) is taxed at the rates for ordinary income, same as for salary.

These are both simplistic examples and most cases are more complex, but the bottom line is that you need to be aware of the potential tax liabilities involved in a short sale, deed-in-lieu-of-foreclosure or foreclosure, and need to speak with a qualified tax professional.

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Will I have to pay taxes on the amount of the 1099?Each homeowner’s situation is and you may or may not be subject to taxation depending on different circumstances.

Many owners are able to avoid taxes through one of three ways: “Insolvency”, the “Mortgage Forgiveness Debt Relief Act of 2007″, or if the loan is a “non-recourse” loan.

Mortgage Forgiveness Debt Relief Act

Under the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) signed by the President on December 20, 2007, IRS code §108(a)(1)(E), provides that a taxpayer will not be taxed upon cancellation of debt income if the following conditions are met:

-   The property sold in the short sale is the taxpayer’s principal residence, as that term is used in IRC §121.

-   The cancellation of debt is Qualified Principal Residence Indebtedness** under IRC Section 163(h)(3)(B).

-   Applies to debt forgiven in calendar years 2007 through 2012.

*** The simple definition of a Qualified Principal Residence Indebtedness is a the original loan that was used to either purchase or build the residence.

If you would like to read the entire Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) bill you can view it HERE.

Previously, the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) only applied to tax owed to the federal government. In April of 2010, the governor signed Senate Bill 401 (SB401), which provides for relief of paying state taxes on debt forgiven by a lender. The qualifications of SB401 are very similar to the Mortgage Forgiveness Debt Relief Act and should also be discuss with a qualified tax professional. (View further info HERE)

Insolvency

For individuals that do not qualify for the Mortgage Forgiveness Debt Relief Act, there may be another option for avoiding taxes after a short sale or foreclosure, and that is by showing “insolvency”. The term “insolvent” simply means that your debts exceed the value of your assets. If you are in a situation where a debt settlement is necessary, you are probably insolvent. In other words, you would have a negative net worth where your liabilities outweigh your assets.

To let the IRS know about your insolvency, you must fill out IRS Form 982: Reduction of Tax Attributes Due to Discharge of Indebtedness. IRS form 982 says, “Generally, the amount by which you benefit from the discharge of indebtedness is included in your gross income. However, under certain circumstances described in section 108, you may exclude the amount of discharged indebtedness from your gross income”. The specific instructions are contained in section 108 of the Internal Revenue Code.

One of the “circumstances” they are referring to is that if you are insolvent before you conduct a short sale then you may be able to “exclude” the forgiven indebtedness (the amount the lender forgave on the loan) from being added to your gross income for that year.

You can find Form 982 here.

Non-Recourse Loans

Put simply, a home loan may be “non-recourse” if it is the original loan that was used to purchase the property. Once a loan has been refinanced, it is no longer “non-recourse”.

In California, according to Code of Civil Procedure § 580b, a loan is non-recourse when either: (1)  The loan is a result of seller carry back financing for all or part of the purchase price for any real property; or (2) The loan is made to purchase a dwelling for not more than four families (1-4 units) given to a lender to secure payment of a loan which is used to pay all or part of the purchase price of that dwelling occupied entirely or in part by the purchaser. (Code of Civil Procedure § 580b.)  When a loan is non-recourse, if a borrower does not pay, a lender can take back (foreclose) on the collateral, but cannot sue the borrower to be personally liable for the money.

Directly from the IRS regarding taxation:

“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.Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.However, it may result in other tax consequences.”  Further information available HERE.

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What About Capital Gains?

The final tax issue that any homeowner must consider is Capital Gains. Capital Gains could become an issue for a homeowner that took money out of a property, or who used the property as an investment and depreciated the property.

Even though a short sale or foreclosure occurs because a home owner owes more than the property is worth, they could still be responsible for capital gains.  An example this would be if the home owner has owned the home for many years and refinanced their loan(s) during that time to take out equity. After refinancing the property, the owner owes more than the property is worth, but the value may still be above the amount they purchased the property for.  This could result in possible “gains” for tax purposes.

For a short sale, capital gain is generally determined by taking the sales price, less the adjusted basis in the property. Adjusted basis is generally the purchase price of the property plus any capital improvements, less depreciation (if the property is investment property). If the adjusted basis exceeds the sales price, then generally there would be no capital gain and there would be a capital loss. (Further information available from the Internal Revenue Service on Home Foreclosure and Debt Cancellation) If the sales price exceeds the adjusted basis, then the borrower generally has a capital gain.

Even if there is a capital gain income on a home, if someone has owned and used the home as their principal residence for periods totaling at least two years during the five year period ending on the date of the sale, the owner may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income.

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Again, all of the information above is all provided as a starting point and is not tax advise.  Please contact a tax professional to discuss how taxes after a short sale or taxes after a foreclosure will affect you.

Here are links to two IRS articles that cover Mortgage Forgiveness Debt Relief Act and Debt Cancellation.

IRS – Ten Facts About Mortgage Debt Forgiveness
IRS – FAQ: The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

If you are facing foreclosure or have any questions regarding a short sale and the foreclosure process, please do not hesitate to contact our team. We specialize in San Diego Short Sales, Orange County Short Sales and Riverside Short Sales.