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SHORT SALES: Deficiency judgments & tax consequences

By
Real Estate Agent with The Shannon Jones Team DRE #01247705

Frequently when we're assisting sellers with short sales in Long Beach and surrounding communities, we are asked about tax consequences and deficiency judgments. While I'm not an attorney or a tax consultant, here are a few things for sellers to keep in mind.

What exactly is a deficiency judgment? It's a judgment for an amount not covered by the value of the asset that secured the loan. In everyday terms, it's the lender's attempt to "go after" the sellers for the difference between the amount owed on the loan and the approved short sale price.

In California, Senate Bill 931 recently became law, meaning that any mortgage lender holding a first trust deed cannot obtain a deficiency judgment if they provide written consent to a short sale. Instead, they must accept the sales proceeds as full payment. This law applies to first trust deeds secured by one- to four-unit residential properties but doesn't limit the lender from seeking damages for fraud or waste by the borrower.

And what about taxes? Many homeowners become concerned when they learn that their lender will be issuing a 1099 for the amount of the bank's loss, which becomes "phantom" income for the homeowner. However, in 2007, Congress passed and the president signed the "Mortgage Forgiveness Debt Relief Act of 2007." The legislation was effective for discharges of indebtedness on or after January 1, 2007 and before January 1, 2010. The Federal Bailout Legislation H.R. 1424, passed on October 3, 2008, extended this relief through December 31, 2012.

Under the law, a discharge of "qualified principal residence indebtedness" is excluded from taxable income.  There are limits to the exclusion and it applies only to a mortgage secured by the principal residence. A similar law passed in California last year provides relief from state taxes on mortgage forgiveness as well.

Homeowners who are considering short sales are always advised to consult with their attorneys and tax advisors for advice that is specific to their individual situation.

Posted by

 Shannon Jones

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Shannon Jones is a Realtor residing in Long Beach, CA. She leads an award-winning real estate team that has been serving home buyers and sellers in Long Beach and surrounding communities since 1998. Shannon and her team provide their clients with high quality marketing and excellent service. You can check their reviews on Yelp or Zillow.  

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CalBRE License #01247705 / 562-896-2456 / Shannon (at) ShowMeHome.com
 

Comments (1)

Sandra White
John L Scott Real Estate - Port Townsend, WA
Experienced Residential Resale Broker

Shannon, interesting information.  We are beginning to see more short sales in our area, but I have not had the opportunity to handle one since the 80's in Calif.  It seems you have to have a lot of time and patience.  We now have the name of an attorney who will deal with the lender for the homeowner for a nominal fee.  Thanks for your post.

Jan 04, 2011 10:22 AM