Tag Archives: short sales

California Short Sellers No Longer Need To Worry About Federal Income Tax

California Short Sellers No Longer Need To Worry About Phantom Income

California Short Sellers No Longer Need To Worry About Phantom Income

With the surging San Francisco and Bay Area real estate market, shorts sales and foreclosures have seen a steep decline. Even so, they still exist in San Francisco, San Mateo County as well as neighboring counties and cities.

Thanks to California Senator Barbara Boxer who pushed this issue with the IRS and got this letter  as clarification about the Mortgage Debt Forgiveness Act.

“The IRS has clarified in a letter that California’s troubled homeowners who sell their homes in a short sale are not subject to federal income tax liability on “phantom income” they never received.”

Homeowners in California involved in short sales have been concerned with “phantom income” which refers to the amount of debt that is forgiven when a lender is willing to accept less than the full amount owed (as in a short sale). If you owed $500,000 on your mortgage, and the lender allowed a short sale for $450,000, you would have “received” $50,000 in phantom income.

In 2012, Congress extended the Mortgage Forgiveness Debt Relief Act. The California version expired at the end of 2012. The Federal provision expired at the end of 2013. This year instead of waiting for Congress to pass (or not) the Mortgage Forgiveness Debt Relief Act, the IRS and the Franchise Tax Board (California’s version of the IRS) eliminated the phantom income tax. In short, California short sellers of residential properties (1 – 4 units) will continue to be protected from taxation on the “phantom income” received in a short sale.

With so many issues nipping at the heels of still underwater homeowners at least the fact that Uncle Sam and his California cousin will not have their hands out at the end of any short sale transaction ready to collect phantom income will make things slightly easier for still distressed property owners.

Mortgage Debt Forgiveness: 10 Key Points


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Filed under California, San Francisco, San Mateo county, short sales, Tax Credits

Luxury Homes Foreclosure Trend

Luxury Homes Foreclosure Trend

Luxury Homes Foreclosure Trend

Luxury homes continue to foreclose at a record rate.

Even though pundits say that the economy continues to gain more traction and that the worst of the real estate crisis may be over, distressed properties continue to pop up in the Bay Area.

Inventory continues to be in short supply and experts say that we have 4-5 years (we’ve heard up to 10-12 years) left of REOs coming on the market. Unlike the past years, the upcoming REOs tend to skew toward the high end. Homes valued in the $1.5 million-plus range continue to climb in the foreclosure scene. For a couple of examples, a $2.5 million home recently foreclosed in Cow Hollow and likewise for a $1.8 million home in Hillsborough.

Folks over at RealtyTrac state that foreclosure activity on homes in the $5 million-plus value range jumped 61 percent from the same time period in 2012. During the real estate meltdown, high end homes certainly did see their share of REO casualties but banks often held off foreclosing because of the high losses. Instead the banks worked toward loan modifications, forbearances and short sales.

Now with values on the rise, many luxury homes have fallen into the foreclosure track. In the past, banks often hesitated at foreclosing due to possible high losses. Now, banks may take more chances to foreclose on the high ticket homes. With increased profits, banks with defaulting loans seem more willing to roll the dice on the luxury inventory. Such actions may end up signifying snake eyes for distressed high end homeowners.

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Filed under Banks, California, Foreclosure, Loan Modifications, short sales

Return Of The Dual Escrow

Return Of The Dual Escrow

Return Of The Dual Escrow

What Is A Dual Escrow And Why Use It?

Why do one escrow when you can do two? With prices continuing to climb, people find creative ways to structure escrows and in some instances that means doing a double escrow. What is a double escrow and why do it?

A double escrow is having two escrows at the same time. Why would someone do a double escrow? Dual escrows typically occur during a hot market when someone can profit by buying and selling a property at the same time.

Many escrow officers will advise or even refuse to conduct the transaction if all of the sales information has not been disclosed to all parties. Experienced and ethical escrow officers tell stories of one party not fully disclosing info to one of the other parties.

Oftentimes the lack of info involves elder abuse (e.g. someone buying a senior’s home for below market value then reselling it for above market value) or other predatory tactics. A good escrow officer will insist to talk with a seller before conducting the double escrow. Oftentimes buyers will hide some fact from the sellers which can cause serious issues down the line.

Predatory Dual Escrows?

For a double escrow to occur there needs to be something that signifies a rise in sales price (e.g. upgrades, repairs, or a lease option/right of first refusal). It can’t be just one party taking advantage of another party. There needs to be some reason for the change in value. For this reason, doing a double escrow for an REO or short sale would not be allowed or would be considered fraudulent. During short sales and REO sales, the selling bank considers the selling price to be at or near fair market value so conducting a dual escrow and reselling at a significantly higher price would be tantamount to fraud.

Like any other real estate transaction, unusual structuring of a deal can benefit all parties. The rare instances for the proper use of a dual escrow can be a useful tool but those who use the tactic can end up getting themselves and other parties in something more painful than hot water.


Filed under Banks, short sales

HOW TO KEEP AUCTION.com out of your Short Sale

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August 8, 2013 · 4:20 pm

Mortgage Forgiveness Debt Relief Act Expires End of this Year!!!

Don’t Get Short Screwed By Uncle Sam!


August 8, 2013 · 5:06 am

Mortgage Debt Forgiveness Relief Act Set To Expire December 31, 2013

Mortgage Debt Forgiveness Relief Act Set To Expire December 31, 2013

Mortgage Debt Forgiveness Relief Act Set To Expire December 31, 2013


Homeowners On The Fence About A Short Sale Should Consider The Year End Expiration Of Tax Break

It seemed like just yesterday that underwater homeowners faced a conundrum to either short sale or wait things out to see if the market would improve. For many homeowners the market improved so much that they now sit right side up with actual equity in their home. Short sales have become equity (or what many people refer to as “normal”) sales.

Even with the hot sellers market, some Bay Area homeowners remain underwater. Because we passed the halfway point in 2013, homeowners have that same decision as before. With the Mortgage Debt Forgiveness Relief Act set to expire at the end of this year, homeowners on the fence must choose whether to short sale and take advantage of the tax break or try another option.

What would those other options be?

1- Although banks have been downplaying the loan modification option for some time, homeowners can still apply for either a HAMP (government guidelines) or one of the in-house lender modification programs. Usually the banks mirror the HAMP guidelines but some differences often exist. Either way, those choosing this option should consider using a non-profit counselor to advocate on your behalf, instead of dealing directly with the bank.

2- Refinance through HARP (Home Affordable Refinance Program). Homeowners with no late payments in the past 12 months who are underwater may be eligible to refinance through the HARP loan. Many guidelines exist including that the loan be owned by Fannie Mae or Freddie Mac. Those interested might consider working with a knowledgeable loan officer who doesn’t necessarily need to work with your current servicer.

3- If the above options don’t work, then a short sale may be the best bet. A short sale, handled correctly, will allow the seller to exit the home without any debts. The short sale can be particularly handy for homeowners with multiple liens and/or HOA liens. Depending on the status of your loans, a foreclosure may leave homeowners open to financial liabilities, while a short sale many times allows a cleaner break.

The Importance Of the Mortgage Debt Forgiveness Relief Act

In a short sale, the Mortgage Debt Forgiveness Relief Act plays an important part of the loan forgiveness. The bank essentially “pays” the delinquent borrower the amount of debt forgiven, which is why creditors send Form 1099-C to the borrow showing the amount of “income” that he or she received as forgiven debt.

We conferred with CPA Robert Caplan about the Mortgage Debt Forgiveness Relief Act.
Mr. Caplan mentioned, “Homeowners should keep in mind that they can only apply this provision if it was to purchase or improve the property. The advantage is particularly important if they have not re-financed the hell out the house.”

If considering a short sale, a homeowner might worry about being a target for an audit but Mr. Caplan mentioned, “It appears that there is not a lot of auditing for relief indebtedness if you do your tax planning carefully.

To many people, it would seem logical to once again extend the Act but with the Congress scoring a 14 percent approval rating who knows if they will use logic to extend this program.

This sellers market will not last forever. Interest rates should climb. At some point, real estate inventory will probably rise. Those on the fence should consult with their financial planner, accountant or other professional who can look at the big picture to decide if now if the time to hold on or sell and take advantage of the Mortgage Debt Forgiveness Relief Act.

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Filed under Banks, California, Foreclosure, Loan Modifications, Mortgages, San Francisco, short sales, Tax Credits

California State Senate Passes SB 30 Mortgage Debt Forgiveness

Senate Passes SB 30 Mortgage Debt Forgiveness

Senate Passes SB 30 Mortgage Debt Forgiveness

The Personal Income Tax Law Mirrors The Federal Mortgage Forgiveness Debt Relief Act Of 2007

In the first completion of a long overdue process the California State Senate this week passed SB 30 which mirrors the federal Mortgage Debt Forgiveness Relief Act. SB 30 which provides tax relief to those who are selling a home in a short sale will now move on to the state Assembly.

The Personal Income Tax Law conforms to specified provisions of the federal Mortgage Forgiveness Debt Relief Act of 2007, relating to the exclusion of the discharge of qualified principal residence indebtedness, as defined, from a taxpayer’s income if that debt is discharged after January 1, 2007, and before January 1, 2010. The federal Emergency Economic Stabilization Act of 2008 extended the operation of those provisions to debt that is discharged before January 1, 2013.

This bill would extend the operation of the exclusion of the discharge of qualified principal residence indebtedness to debt that is discharged on or after January 1, 2013, and before January 1, 2014.

SB 30 Tied To SB 391

In late May, the California Senate Appropriations Committee linked SB 30 to SB 391, a bill which creates a $75 recording tax to be used of affordable housing. This link, in the form of an amendment, says that SB 30 cannot take effect unless SB 391 does as well.
Politics aside, having SB 30 in place will offer homeowners another option to choose a short sale over a deed-in-lieu or a foreclosure.

If politicians insist on having the bill tied to SB 391 then let it be, because SB 30 offers too much importance for homeowners to allow it to languish in the capital.

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Filed under California, short sales, Tax Credits