How can a short sale help you? (Specifically)

Feb - 16 | | No comments. | Blog, Short Sale

14 million homeowners are in some stage of foreclosure. Even if the economy turns around today, if you are forced to sell your home due to life changes (death, divorce, job relocation, job loss, etc) you may find yourself considering a short sale.

Since this short sale information is specific to California residents, I will share as many California specific laws, links and rules as possible.

3 critical questions you must ask about short sale:

1)   Will a short sale reduce my financial liability to my mortgage lender? How?

2)   Will a short sale reduce my tax liability to the IRS and Ca State Frnachise Tax Board? How?

3)   Will a short sale be better or worse for my credit than foreclosure? How?

Number 1, a short sale in California should always relieve you, the seller of all financial liability.

California civil code of procedures 580 has been amended (by SB458) to block lenders who accept a short sale from including deficiency verbiage in the approval agreement. >>>The ‘Deficiency’ is the unpaid shortage caused by a short payoff, in the past lenders would include language in the short sale approval agreement that gave them the right to collect after the close of sale.  When you review your short sale approval agreement, you will want to ensure that you are relieved of all financial liability.

(a) No judgment shall be rendered for any deficiency under a note secured by a first deed of trust or first mortgage for a dwelling of not more than four units, in any case in which the trustor or mortgagor sells the dwelling for less than the remaining amount of the indebtedness due at the time of sale with the written consent of the holder of the first deed of trust or first mortgage. Written consent of the holder of the first deed of trust or first mortgage to that sale shall obligate that holder to accept the sale proceeds as full payment and to fully discharge the remaining amount of the indebtedness on the first deed of trust or first mortgage.    (b) If the trustor or mortgagor commits either fraud with respect to the sale of, or waste with respect to, the real property that secures the first deed of trust or first mortgage, this section shall not limit the ability of the holder of the first deed of trust or first mortgage to seek damages and use existing rights and remedies against the trustor or mortgagor or any third party for fraud or waste.    (c) This section shall not apply if the trustor or mortgagor is a corporation or political subdivision of the state.

Number 2, a short sale may reduce your tax liability, but it can also create a taxable event, just like a foreclosure. Speaking intellectually and not giving tax advice, below you can reference the tax code for the IRS and the State.

IRS tax short sale and foreclosure information:

http://www.irs.gov/individuals/article/0,,id=179414,00.html

California State Franchise Tax Board short sale and foreclosure information:

https://www.ftb.ca.gov/aboutFTB/newsroom/Mortgage_Debt_Relief_Law.shtml

Based on the above the basics of taxes and short sales can be summed up as follows:

-If you bought your owner occupied home and never took cashout of your property then you are likely exempt from paying state/federal taxes on the lenders loss represented by a 1099-c.

(No cashout means, you never took money from your property in the form of a refinance that was NOT used for home improvement or for a divorce settlement.)

When your lender loses money on a short sale, they have to write it off their books and notify the IRS. They will send you a 1099-C notifying you of the amount. If the lender forecloses they will send a 1099-A notifying you of the amount lost. Unless you are exempt, you are responsible for the taxes owed on the loss represented by the 1099.

In California the state has mirrored the actions of the IRS in providing exemptions for distressed homeowners who get 1099’s for short sale/foreclosure losses.

Number 3, a short sale is better than a foreclosure on your credit report. A foreclosure can report in your file for up to 10 years and keep you from getting another mortgage for 5-7 years. A foreclosure is a repossession; it tells future creditors you abandoned the agreement and made no attempt at resolving it, even if that’s not the case.

A short sale is a settlement; it shows good faith on your part. After a short sale you are eligible for a new mortgage within 3 years and some borrowers see an improvement in their score if they complete a short sale with no missed payments.

In short, a short sale stands up as the best form of resolution for California homeowners who have to sell but owe more than their home is worth. If you have more questions or would like my personal support at no up front or out of pocket cost ever, call me or send me an email.

Call me for support and help with your short sale,

 

Sean Chapman         Chapman Real Estate Group         858-779-4760

 

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