California Short Sales in 2014, Debt Forgiveness, Tax Liability Update
As we approach the end of 2013 and the expiration of The Mortgage Forgiveness Debt Relief Act of 2007, many may be wondering what to expect if they must sell their home in a short sale as an alternative to foreclosure in the coming year. Questions on whether California sellers in a short sale transaction will be taxed on the debt forgiven have once again surfaced.
We now have clarification on what will happen to California home sellers who short sell their homes after The Debt Relief Act of 2007 expires.
Yesterday, the Pacific West Association of Realtors (PWR, a local board of Realtors that we belong to) released an update on where the IRS and the California Franchise Tax Board stand on this issue.
This is what they had to say:
"As we anticipated, C.A.R. today received a letter from the California Franchise Tax Board (FTB), obtained by the State Board of Equalization, clarifying that California families who have lost their home in a short sale are not subject to state income tax liability on debt forgiveness “phantom income” they never received in a short sale.
Last month, in a letter to California Sen. Barbara Boxer, the Internal Revenue Service (IRS) recognized 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 home seller for federal income tax purposes. Following the IRS’s clarification, C.A.R. sought a similar ruling by the California FTB. Now with the FTB’s clarification, underwater home sellers also are assured that they are not subject to state income tax liability, rescuing tens of thousands of distressed home sellers from California tax liability for debt written off by lenders in short sales.
PWR is pleased with the recent clarifications issued by the IRS and the California Franchise Tax Board, which protect distressed homeowners from debt relief income tax associated with a short sale in California. We would like to thank Sen. Boxer and BOE member George Runner for their leadership in obtaining this guidance from the IRS and FTB. Distressed California homeowners can now avoid foreclosure or bankruptcy and can opt for a short sale instead, without incurring federal and state tax liability, even after the Mortgage Forgiveness Debt Relief Act of 2007 expires at the end of this year."
We are happy to hear that short sales will continue to be a viable alternative to foreclosure and that sellers will not incur federal or state tax liability. We are experienced in selling short sale properties and are available to answer questions if you or someone you know is considering doing a short sale. You can also visit the California Association of Realtors Short Sale Resource Center for more information and help.
**IMPORTANT NOTICE: The Joe Sopo Team & Keller Williams Realty are not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan. If you stop paying your mortgage, you could lose your home and damage your credit rating."
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