Short Sales - Will the Seller Owe Tax?
March 2, 2010
The answer to "Will the Seller Owe Tax?" is "It depends. One of the important steps that a short seller would be well advised to take is to consult a Tax account or tax attorney. Real estate agents are generally not certified in tax law or IRS regulations. Therefore, the advice of an expert in these fields can be crucial in an underwater seller's decision to sell, to attempt a modification or to enter into a short sale or to just let the foreclosure process run its course.
Just as an aside, it is my belief that lenders generally receive a better financial result from either a modification or a short sale. Yet for the past two to three years, lenders seem to have been averse to responding to an underwater homeowners request for either modification or short sale. The federal government under the Making Homes Affordable Program have attempted to incentivize lenders, but the process is still lengthy and extraordinarily frustrating for a seller or a potential purchaser of a short sale property. Lenders seem willing to greatly discount the debt owed when a property is sold, mainly to investors with cash, at a foreclosure sale on the courthouse steps.
Back to the main question. The IRS has extended the regulation that eliminates the payment of income tax on the amount of "debt forgiveness" that a short seller might owe, This extension is in effect for federal income taxes until January 2012. However, a California short seller can still be liable for state income tax on the amount of "debt forgiveness" (COD- Cancellation of Debt). There have been two bills presented in the state legislature, but both seem to be stymied.
There are at least two categories of home loans: recourse and non-recourse. (There are also all those home equity lines of credit). A recourse loan is one that was hard money or one that was not taken out when the property was originally purchased. California is a non-recourse state and a non-recourse loan is a purchase money loan - a loan put on the property at the time the property was purchased. Non-recourse means that the lender can only take the property back in a foreclosure action. The lender can not lien other assets that a borrower may have.
The question that a professional tax person can answer is whether income tax will be owed to the state of California on COD if the loan was a non-recourse loan. If you get an answer to this question, please click the comment button and let me know.
The answer to "Will the Seller Owe Tax?" is "It depends. One of the important steps that a short seller would be well advised to take is to consult a Tax account or tax attorney. Real estate agents are generally not certified in tax law or IRS regulations. Therefore, the advice of an expert in these fields can be crucial in an underwater seller's decision to sell, to attempt a modification or to enter into a short sale or to just let the foreclosure process run its course.
Just as an aside, it is my belief that lenders generally receive a better financial result from either a modification or a short sale. Yet for the past two to three years, lenders seem to have been averse to responding to an underwater homeowners request for either modification or short sale. The federal government under the Making Homes Affordable Program have attempted to incentivize lenders, but the process is still lengthy and extraordinarily frustrating for a seller or a potential purchaser of a short sale property. Lenders seem willing to greatly discount the debt owed when a property is sold, mainly to investors with cash, at a foreclosure sale on the courthouse steps.
Back to the main question. The IRS has extended the regulation that eliminates the payment of income tax on the amount of "debt forgiveness" that a short seller might owe, This extension is in effect for federal income taxes until January 2012. However, a California short seller can still be liable for state income tax on the amount of "debt forgiveness" (COD- Cancellation of Debt). There have been two bills presented in the state legislature, but both seem to be stymied.
There are at least two categories of home loans: recourse and non-recourse. (There are also all those home equity lines of credit). A recourse loan is one that was hard money or one that was not taken out when the property was originally purchased. California is a non-recourse state and a non-recourse loan is a purchase money loan - a loan put on the property at the time the property was purchased. Non-recourse means that the lender can only take the property back in a foreclosure action. The lender can not lien other assets that a borrower may have.
The question that a professional tax person can answer is whether income tax will be owed to the state of California on COD if the loan was a non-recourse loan. If you get an answer to this question, please click the comment button and let me know.
posted by shirley harry at 7:55 AM
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