What does this mean for Temecula Valley home owners? If their short sale closes after January 1, 2013, they will owe taxes on the deficiency, or cancellation of debt. Cancellation of debt does not apply to non-recourse loans. A non-recourse loan is exempt from deficiency judgments: in other words, the lender cannot sue a home owner for the deficiency after foreclosure. A non-recourse loan is a loan that was used to buy a home, but not all purchase money loans (loans used to initially buy homes) are non-recourse.
A Temecula Valley California homeowner needs to find out what type of loan they have before considering short sale, or strategic default. A recourse loan, which are loans that are refinances and other types of loans are subject to cancellation of debt, and the lender can sue for a deficiency judgment. In other words, the home owner still owes their lender the debt on the deficiency (the difference between the amount their home sold and what is owed), as well as income taxes.
What is Cancellation of Debt?
For example: if a home owner owes $550,000 and their home sells for $350,000 in a short sale, $200,000 is mortgage debt that is forgiven by their lender. The forgiven debt, $200,000 is considered income and their lender files a 1099-C, or cancellation of debt. The home owner must pay income taxes on the $200,000.
For many Temecula Valley California homeowners this could be a crushing blow to their already stretched-to-the-limit finances. Whether a short sale or foreclosure, Temecula Valley California homeowners could be liable for income taxes on the deficiency, or cancellation of debt.
It’s highly possible the Mortgage Forgiveness Debt Relief Act and Cancellation of Debt may not be extended as is, but another mortgage debt relief act will take its place. The National Association of Realtors® is lobbying for an extension, but now it is difficult to predict if the House and Senate will be able to agree, or if the mortgage debt relief act will be swept away entirely.
In the case of a short sale, a Temecula Valley California homeowner’s lender on a recourse loan may agree to forgive the deficiency debt and give up their right to pursue deficiency judgment, but they will reserve their right to file a 1099-C, or cancellation of debt. Because short sales are subject to lender approval, many of the lender’s terms in written short sale approval are “non-negotiable.” Your real estate agent can try to re-negotiate the terms, but it’s unlikely the bank will agree.
It is broker recommended a Temecula Valley California homeowner consult with a qualified attorney or CPA for the legal and/or tax consequences of a short sale. Broker/agents are not qualified to give legal and/or tax advice.
If you would like more information on Temecula Valley California short sales, contact us 951.491.4063 for help.