• Mortgage Deficiency
    • A mortgage deficiency is the difference between the loan amount owed by the borrower and the purchase price of the short sale paid to the lender. Depending on the type of loan you are in greatly affects this type of implication, in most instances homeowners are protected and lenders can’t pursue them for the deficiency. However, in some cases a short sale can leave you owing a substantial debt, which can be collected by garnishing your wages or other aggressive collection actions.Solution: Maximum Real Estate will work hard to get your deficiency waived as a condition of the short sale.

  • Taxes
    • A short sale, where the lender agrees to reduce some or all of the outstanding debt may give rise to forgiveness of debt income (also called “cancellation of debt” income). The amount of the debt that the lender agrees to write off is treated as “ordinary income” (as opposed to capital gains income which is taxed at a lower rate). Even though the lender may be taking this action to facilitate the sale by the owner who is under a notice of default and facing a foreclosure, the agreement between the owner and the lender is considered voluntary and the amount of the loan written off by the lender is treated as forgiveness of debt (cancellation of debt). The taxpayer will may receive a 1099 tax form from the lender in the amount of the cancellation of debt.This forgiveness or cancellation of debt which is treated as “ordinary income” under certain circumstances may or may not be subject to taxation. Under the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) signed by the President on December 20, 2007, Internal Revenue Code §108(a) (1) (E) was added and provides that a taxpayer will not be taxed upon cancellation of debt income if the following conditions are met:

      1-The property sold in the short sale is the taxpayer’s principal residence, as that term is used in IRC §121.

      2-The cancellation of debt is Qualified Principal Residence Indebtedness** under IRC Section 163(h) (3) (B).

      3-The indebtedness is discharged after January 1, 2007 and before January 1, 2013. (The end date was increased by three years from 2010 to 2013 pursuant to H.R. 1424, the Emergency Economic Stabilization Act of 2008).

      Qualified Principal Residence Indebtedness is a loan secured by the residence used to acquire, construct or substantially improve the residence. The income relief provided is capped at $1,000,000 in the case of a married person filing a separate return and $2,000,000 for all others.

      Any reduction of indebtedness excluded by IRC §108(a) (1) (E) will be applied to reduce the basis of the taxpayer’s principal residence, but not below zero. This could result in a higher amount of capital gains tax owed by the taxpayer.

      Recently passed California law, SB 1055, conforms California Revenue and Tax Code Section 17144.5 to federal law with the following exceptions:

      1-The maximum amount of acquisition indebtedness is reduced to $800,000 for couples filing jointly and $400,000 for individual filers.

      2-The maximum amount of debt relief income that can be forgiven is $250,000 for couples filing jointly and $125,000 for individual filers; and

      3-California’s debt relief statute applies to property sold on or after January 1, 2007 and before January 1, 2009.

      Finally, if the owner has owned the property for some time and has refinanced to take out some of the equity, the owner could be subject to capital gains taxation when selling the property as well. For example, the borrower has a remaining loan on the property when the borrower refinances in order to buy an investment property (or to buy a car, to take a vacation, consolidate credit card debt, etc.) and now owes $300,000 to the lender. Thus, the taxpayer’s adjusted basis may be lower than the outstanding balance on the loan.

      (Above information provided by C.A.R. Legal, form more info please visit http://www.car.org/legal/legal-questions-answers/2010-qa/taxation-foreclosures-shortsales/ ) or click here for the article (I have attached the article to the e-mail labeled CAR letter for you to create a pop up link for)

      Solution: With Maximum Real Estate, We will point you in the right direction so you are well informed and are able to make a sound decision. We will provide you resources and relevant tax publication information for you to review with your tax advisor.

  • Credit
    • Short sales typically prevent you from buying a new home for two years under the new Fannie Mae guidelines. A bankruptcy, foreclosure, or deed in lieu is likely to prevent homeownership for much longer.Solution: Maximum Real Estate will use all available leverage to protect your credit rating to the extent possible. In the worst case, according to current Fannie Mae Guidelines, a short sale will impact your ability to qualify for a new home for only two years. In addition, if you have good credit and buying a house sooner is important to you, we may be able to work with your attorney to use legal means to protect your credit from any negative consequence.