The biggest concern of many upside-down Sacramento sellers is whether they will owe taxes to the state of California on a short sale. It matters not whether the home goes all the way through foreclosure, reverting to the bank, or whether the seller elects to do a short sale, mortgage debt relief may trigger a state tax bill.
Some sellers have enough losses to offset the tax consequences, and some sellers qualify for insolvency, which can make them exempt from paying taxes. There are other exclusions. My advice is always the same: talk to a tax accountant, preferably a certified public accountant (CPA), because I am not licensed to give tax advice.
The tax liability from a short sale is the main reason short sellers want to get the highest price possible for their home, and it's the reason they want me to push for multiple offers and to continue sending offers to the bank even after seller's acceptance. Contrary to popular belief, continuing to send offers to the bank does not delay the short sale, unless, of course, the bank is Countrywide (and a handful of others).
I get short sale approval typically within 6 to 8 weeks, regardless of how many offers the bank receives. My job is not to dump the home in the lap of the first buyer who comes along. My job is to get the seller as much as possible, which may lessen the sellers' tax liability. Not every Sacramento short sale agent shares this sentiment.
If you're contemplating a short sale in Sacramento, you may want to follow Senate Bill 97 in the legislature. It was introduced January 26, 2009, by Senator Calderon, to amend Section 17144.5 of the California Revenue and Taxation Code. Senate Bill 97 is an attempt to conform to the federal Mortgage Forgiveness Debt Relief Act of 2007, which excludes mortgage debt forgiveness taxation on a personal residence. The bill extends those provisions from January 1, 2007 to January 1, 2010.
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If you're looking for an experienced short sale agent in Sacramento, call Elizabeth Weintraub at 916.233.6759.
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Elizabeth Weintraub is an author, home buying columnist for The New York Times-owned About.com, a Land Park resident, and a Land Park real estate agent who specializes in older, classic homes in Land Park, Curtis Park, Midtown and East Sacramento. Weintraub is also a Sacramento Short Sale agent who lists and successfully sells short sales throughout the four-county Sacramento area. Call Elizabeth Weintraub at 916.233.6759. Put 35 years of real estate experience to work for you. Broker-Associate at Lyon Real Estate. DRE License # 00697006.
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Elizabeth - I sent a client to speak with her accountant regarding this very issue last week. A blanket response does not work as each case is different.
Elizabeth: Great advice about state taxes, and consulting an expert on the subject. There is no hiding from the tax man.
Elizabeth - That's a very informative article. My understanding is that it is imperative that short-sale sellers speak with their accountant or tax adviser. Each case can be looked at quite differently. For example, a short-sale coming as a result of buying a house in 2005 at the height of the market, without any cash being taken out by the homeowner may be seen in a more lenient manner. However a homeowner, who purchased a decade ago, and refinanced to take out equity to purchase other assets, boats, airplanes, toys may be more at risk for taxes.
But as you say, I'm not a tax professional, and it is vitally important that each person finding themselves in that predicament, should seek professional council.
Some sellers are not even aware they might have some tax liability for the "short" in the short sale. Good to tell them to get some advice.
I overhear agents spouting the tax consequences of short sales or foreclosure way too often. We NEED to send them to a pro.
Elizabeth,
SB 1055 gives short sale seller relief to Claifornia's. This can be found on the California Franchise Tax Board website.
Prior to the Mortgage Forgiveness Debt Relief Act of 2007 (HR 3648), many homeowners who sold their properties as short sales or lost their homes in foreclosure could've been on the hook with the IRS. After HR 3648 passed into law on December 2007, the tax liability was eased on struggling homeowners but not without some necessary restrictions of course.
Californians, however, were not completely exempt from any tax liabilities incurred in a short sale or foreclosure because we are also subject to California state tax laws. In order to put California tax laws regarding mortgage debt forgiveness in line with the changes made by HR 3648 to federal tax laws.
Though the Senate Bill 1055 now conforms to the federal Mortgage Forgiveness Debt Relief Act of 2007 (HR 3648), it has a difference that may need to be revised in the near future. SB 1055 will only cover discharges from January 1, 2007 to December 31, 2008 in contrast to HR 3648 which covers discharges from January 1, 2007 to December 31, 2009.
Homeowners who qualified and have already filed and included discharge of principal residence indebtedness as income for California purposes may need to file an amended or corrected state income tax form. Consult with a qualified CPA for specific details of your situation; this is not to be regarded as tax advice.
Disclaimer: If you require specific tax advice, you should contact a professional CPA. This information is intended to provide general information and it is not substitute for individual tax advice.
Hi Gary: You should make note that Senate Bill 1055's time frame expired last year. That's why SB 97 is so important. If passed, it provides an exemption to short sale sellers in 2009.
Also, the federal 2007 Mortgage Forgiveness Debt Act extended the sales tax exemption through 2012.
You hit the nail on the head with advising them to get advice from a CPA. My mom is a retired CPA and I know just enough to be dangerous, but I just keep my mouth shut and send them to their CPA.
Hey Elizabeth,
I am aware of it and figured since President Obama's, "Emergency Economic Stabilization Act of 2008 (H.R. 1424) extended the Mortgage Debt relief Act till 2012, California would do something (SB 97) to extend the relief given in SB1055.
Just wanted those who did short sales between Jan 2007 and Dec 2008 to know what to say to their CPA's who are unfamiliar with SB1055. I've encountered some CPA's & Tax Attorney's who weren't familiar with these issues. Everyone in California should be contactng their local representive to make sure this Bill gets passed.
Sacramento is lucky to have you as a resource Elizabeth. Keep helping families.
Elizabeth, good for you continuing to present offers to the bank. Of course with CW and those "others" in the line-up, it doesn't work for every short sale. You're a good example of what a real estate agent needs to do in order to do the best job for their sellers or their buyers. I'd refer business to you in a heartbeat!!!
Elizabeth, you are truly a short sale advocate for buyers in today's market! I've recommended you to David Patterson as a guest on his real estate radio show!
Elizabeth, Thank you for being a great source and resource for so many agents and especially for your clients. They are so lucky to have you representing them!
We always send our SS sellers to their accountant so they know what to expect...your book is being shipped to us as I write....mmmm...bedtime stories to enrich the gray matter !