Taxes

It’s important to note that one of the major short sale loopholes in California (and Fed) is going to expire at the end of 2012.  My market being San Diego, this is crucial for our clients.  Currently, if a borrower completes a short sale they are guaranteed to have the debt forgiven in CA due to new Senate Bill 458 that came out July 15th of 2011.  That is great, but then that creates a seperate liability because the are guaranteed to get a 1099-C for the forgiven debt early the year after the short sale is completed.  That 1099-C will equal whatever the amount of forgiven debt was in the short sale, and it will be viewed as ordinary income by the IRS.  For instance, if a seller owes $400,000 on their loan and the short sale yields $300,000 net to their lender… they will recieve a $100,000 1099-C by January 31st the following year.  The easiest way to avoid having to pay taxes on this ‘income’ is to qualify for the Mortgage Debt Forgivness Act.  To qualify, a borrower must have purchase money loans (or non-refinanced loans) and be able to qualify the property as their principal residence at the time of the sale.  If these two criteria can be met a borrower does not pay any taxes on the 1099c for forgiven debt.  The Mortgage Debt Forgiveness Act is set to expire for both CA and FED at the end of 2012.  It’s not certain whether this will be extended… so we advise all borrowers considering a short sale to look at getting the process started by March 2012 to ensure completion before the end of the year.