Southern California Bank Short Sale Information

Short Sale Laws Benefitting Southern California Luxury Home Sellers

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Short Sale Laws Benefitting Southern California Luxury Home Sellers

Struggling owners of Southern California luxury homes may discover current California short-sale laws to give them an edge. Taxes are of primary concern for many of these homeowners. California law is different from US law on this topic.

California home sellers using Short Sales can avoid California state income tax liability if a series of conditions are met. In California law requires:

  • The property must be in California
  • It must be a primary residence
  • The property includes only 1 to 4 units
  • The loan must be non-resource
  • It must be a purchase money loan

The IRS does not always consider income stemming from Cancellation of Debt as taxable. The Mortgage Debt Relief Forgiveness Act once took care of that problem (2007-2013) and now it is the Homeowners Debt Relief Extension Act of 2014. Debts owed to someone else that are cancelled or forgiven may be taxable.

Homeowners Debt Relief Extension Act of 2014

A summary of the Homeowners Debt Relief Extension Act of 2014 states “amends the Internal Revenue Code to: (1) extend through 2015 the exclusion from gross income of imputed income from the discharge of indebtedness with respect to a principal residence; and (2) exclude from the definition of ‘domestic production gross receipts’ for purposes of the tax deduction for income attributable to domestic production activities.”

Situations that may allow exceptions to the tax burden, include:

  • Qualified principal residence indebtedness
  • Bankruptcy
  • Insolvency
  • Certain farm debts
  • Non-recourse loans (where the bank takes back the property and does not sue the owner)

By definition, a Short Sale means that a lender reduces the amount of the balance on a home loan. Here is an example of how a financially distressed Southern California homeowner could use the Homeowners Debt Relief Extension Act. If a Southern California home loan is for $2 million, the lender may agree to take $1.7 million for the home. Consequently, the borrower is given $300,000. The homeowner will not likely have to pay federal income taxes on that money.

Please refer to your CPA, tax accountant, and attorney to access the pros and cons of short sales in your specific situation.

Buying and Selling Southern California Homes

For more information about opportunities in the luxury home market of Southern California, including Trousdale Estates Beverly Hills homes for sale, call Bob Cumming of Keystone Group Properties at 310-496-8122.

What is Short Sale for Southern California Real Estate?

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For information on short sale real estate in Southern California—in the coastal areas of Orange County (Newport Beach real estate to Laguna Beach), Los Angeles County real estate from Malibu and Marina Del Ray beach homes to Bel Air homes,  and La Jolla real estate in San Diego County, call Bob Cumming of Keystone Group Properties at 310-496-8122.

In a short sale, the bank or mortgage lender agrees to discuss a loan balance because of the an economic or financial hardship on the part of the borrower. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. Neither side is doing the other a favor, a short sale is simply the most economical solution to a problem. Banks will incur a smaller financial loss than foreclosure or continued non-payment would entail. Barrowers are able to mitigate damage to their credit history, and partially control the debt. A short sale is typically faster and less expensive than a foreclosure.  It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance offer.

Lenders often have loss mitigation departments that evaluate potential short sale transactions. The majority have pre-determined criteria for such transactions, but they may be open to offers, and their willingness varies. A bank will typically determine the amount of equity (or lack thereof), by  deterring the probable selling price from an appraisal or Broker Price Opinion (abbreviated BPO or BOV).

Lenders may accept short sale offers or requests for short sales if a Notice of Default has not been issued or recorded with the locality where the property is located. Given the unprecedented and overwhelming number of losses that the mortgage lender have suffered from the foreclosure crisis, they are now more willing to accept short sales than before. This presents an opportunity for the under-water borrowers who owe more on their mortgage than their property is worth and are having trouble selling to avoid foreclosure.