Short Sale Laws that Favor Home Sellers in California in 2014
Short Sale Information and Favorable Laws for California Homeowners in 2014
Here are the Short Sale related laws you should know about as a homeowner in 2014. Please seek the advice of a real estate attorney and a tax professional on how these laws apply to your specific situation. The good news in 2014 is that the California Franchise Tax Board has clarified that California families who have lost their primary home in a short sale are not subject to California state income tax liability on debt forgiveness “phantom income” they never received in a short sale on their primary residence on a non-recourse loan. 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 debt on a non-recourse loan resulting from a foreclosure also does not result in cancellation of debt income. However, it may result in other tax consequences. Please read the IRS letter to Senator Boxer clarifying whether a California homeowner would 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).
Most California homeowners can now avoid foreclosure or bankruptcy and complete a short sale instead in 2014, without incurring California state tax. Also, even as 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 loans. Please be sure to consult your tax advisor and legal professional on how these laws affect your specific situation. If you have converted your primary residence to a rental property in the last 5 years, however, you have lived there 2 years out of the last 5 years, please check with your CPA to see if you qualify to avoid the tax on a short sale on a converted rental property. Also be sure to read below on “Is cancellation of debt always taxable?”. You may also visit the IRS website here for more information on the Mortgage Debt Relief Forgiveness Act and Debt Cancellation.
Did you know that Jean Noriega-Tritle 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 information to find out if short sale is the right option for you in 2014.
First Mortgage: SB 931 Deficiency Waiver on Short Sales |
Second Mortgages: SB 458 Release of Liability on Short Sales in California |
SB 931- 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, 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. |
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 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? Call 760-798-9024 for more information. |