short sales

Mortgage debt relief act, and beyond…

By | HAFA, Making Home Affordable, Sellers, Short Sale, Sonoma County info | No Comments

You might not remember, in 2007 the Mortgage Debt Relief Act was passed, helping homeowners who sold their home for less than what they owed.


The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. The amount of forgiven debt in a short sale would have been subject to taxes as ordinary income, the Mortgage Debt Relief changed this. Initially it ended December 2012 but was extended for an other year till December 2013.  But what about next year? Some good news to report:

Recent announcement from C.A.R. :

C.A.R. has been working with California Sen. Barbara Boxer to protect distressed homeowners from debt relief income tax associated with a short sale in California.  As part of this effort, Sen. Boxer requested the Internal Revenue Service (IRS) to provide guidance on whether mortgage debt forgiveness in a lender-approved short sale would be taxable income under federal law, given California’s recent non-recourse laws for short sales, which were hard fought victories by C.A.R.

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.  The IRS recognizes that the debt written off in a short sale does not constitute recourse debt under California law, and thus does not create so-called “cancellation of debt” income to the underwater home seller for federal income tax purposes.  This clarification rescues tens of thousands of distressed home sellers from personal liability upon expiration of the Mortgage Forgiveness Debt Relief Act of 2007 on Dec. 31, 2013.

C.A.R. is seeking a similar ruling from the California Franchise Tax Board (FTB), which has been awaiting the IRS action; C.A.R. anticipates the FTB will act promptly.  Short sales may raise other tax issues and, as always, REALTORS® should advise their clients to speak with their tax professional regarding the tax consequences of a short sale. C.A.R.’s Legal Department has prepared a Realegal to further explain the IRS’s clarification.
– end announcement
Although the state tax is not as high as federal tax, we are eagerly waiting for the response of the Franchise Tax Board.
Coming from the Netherlands where it’s normal to pay appr. 60% income tax it was a relief to find out that taxes are much lower here, yet paying taxes on mortgage debt that is forgiven is difficult since the one reason that you do a short sale is to avoid foreclosure, not a time of financial prosperity.
As mentioned many times, a short sale is a gracious alternative to foreclosure on so many levels, please consult a good realtor should you face a foreclosure or have a need to sell while still owing more than your house is worth.
Sunset Sonoma Coast
Besides this, enjoy the beauty of nature that surrounds us, take a hike and let the sunset take your breath away…
P.S. Thank you Mathew Schweifler for helping with the research for this blog posting 😉

Time is Running Out: How the Mortgage Debt Relief Act can save you!

By | Foreclosure, Short Sale | No Comments

In 2007, the Mortgage Debt Relief Act was passed in an attempt to help the millions of homeowners who, due to the housing crisis and economic crash, suddenly found themselves in danger of losing their home to foreclosure.

The act has helped many distressed homeowners find solutions to avoid foreclosure and opened up options to them that were previously unavailable.

However, the Mortgage Debt Relief Act was always intended to be a temporary solution and it is now set to expire at the end of 2012. For distressed homeowners, this means that time is limited for you to take advantage of this program.

Time is running out. But there is still a chance to change your financial direction and avoid foreclosure.

Contact your local Realtor for more info.


Loan Modification: are you sure?

By | Foreclosure, HAFA, Making Home Affordable, Mortgage, Short Sale, Sonoma County info | No Comments

I had a meeting with a homeowner who accepted a perfect loan modification last week. Some thoughts to share:

A Loan Modification is what a lot of homeowners in distress are wishing for. However they can be quite stressful and very difficult to obtain. Percentage wise, only a few are working out. The Pro Publica website has some interesting numbers.

The most successful loan modifications are the ones where the loan has adjusted to a high interest rate and the only thing that makes the payment affordable again is a rate adjustment. These are quite often successful. However, according to CoreLogic in the last quarter of 2011 about 22% of all residential properties with a mortgage are ‘Upside down’ or owe more on their house than it would currently sell for.

What I see more and more happening is that a bank will recast the borrowers loan amount down to the current market value of the house and the deferred amount will be due when the borrower sells the house… That is a great option yes???? Or maybe not????

If you are planning to stay in your house and have no intention of moving, this is a good solution. It will take a very long time to regain some equity in your property but then again, you have to live somewhere…

But what in case you need to sell? Maybe next year? And the house is still not worth what you owe on it? Then you should still a short sale… This is a good option, however, keep in mind that any forgiveness of debt is a taxable event. So if the bank agrees with the short sale, you still owe taxes on the amount forgiven. Right now, under the Mortgage Debt Relief act a lot of home owners do not have to pay taxes on the forgiven amount. For now the Mortgage Debt Relief act ends December 2012. This means that as of right now, if you end up selling your house next year, you’ll end up paying taxes on the amount forgiven: Say the bank takes a $100,000 loss, that is considered regular income…

Something else to keep in mind: for a bank to accept a short sale, you need to have a hard ship. The fact that your house is to small/large due to a change in family situation is NOT a hardship. Side note: the average home owner in USA moves about every 6-8 years.

Bottomline, I see more and more that a loan modification is not the best solution for many home owners. It totally depends on your situation. Weigh your options carefully before accepting the loan modification.


$ 8,000 Tax Credit, did you take advantage of it?

By | Foreclosure, HAFA, Making Home Affordable, Sellers, Short Sale, Visit WineCountry, Wine Tasting | No Comments

Who doesn’t want to take advantage of Tax Credits? Remember the Federal Tax Credit programs offering $7,500 and later $8,000 to first time home buyers? A lot of Home Buyers did take advantage of it.

There are some hick-ups with the IRS as to claiming/repaying – see article LA Times -.  What if you  bought the house and ended up buying a house that was not the perfect fit?

Depending on what tax credit you used, it might be worth exploring what the consequences are for you, either selling and buying something else or turning the house into a rental.

The first one in 2008 -$7,500-, for those who purchased homes in 2008, was more like an interest free loan. It had to be paid back in 15 years. See link.

The second one in 2009/May 2010, didn’t have to be paid back but you had to live in the house for 36 months. For both programs, in case you either sell, loose the home to foreclosure, do a short sale, convert the home into a rental, i.e. it stops being your primary residence, you have to pay the credit back. There are some exceptions/rules. See link.

Sidenote: there were different programs for the purchase of new homes during that time. See link.

Depending on your situation, the option of repaying might not be that bad. It’s probably wise to talk to your CPA and discuss numbers with him, however, you might be pleasantly surprised. You may have losses or other situations that offset the ‘gain’ of the credit, if not, maybe paying tax on $8,000 is not the worst option. Remember there are  tax benefits of buying a home. In Sonoma County, home prices have come down a bit more, in general, we lost about 10% last year. Thinking about this, that will offset the fact that you have to pay back the credit.

And last but not least: Living in Sonoma County is great, the next Barrel Tasting weekends are the first 2 weekends in March, it’s the 34th one 😉



Short Sale = not Bank Owned

By | Buyers, Disclosures, Sellers, Short Sale, Sonoma County info | No Comments

In general when you see overviews of Distressed Sales, REO/bank owned sales are put together with Short Sales. This might give the false impression that a Short Sale is a bank owned sale. However, a SHORT SALE IS NOT OWNED BY THE BANK!!!

Just to give a perspective: when a homeowner sells a home there may be several ‘contingencies’. Example: I’d like to sell my home but I need to find another home. In this case when an offer is accepted, the seller asks for some time to find an other home. This can be any amount of time agreed upon. When the seller finds the home they like, they release that contingency and the buyer can move forward with the purchase of the home. Another fairly common one is a builder who sells new homes: I am selling this home and you can buy it when it’s finished.

A short sale is similar: in this case a home owner likes to sell his home but the house is worth less than the mortgage amount. In case the seller is not able to come up with the difference (deficiency) he/she needs approval/agreement as to how the deficiency is handled. Once this approval is given, the contingency is removed and the buyer can move forward with the purchase.

Agreed, bank approval can be a little more complicated and yet that is not the point. In the case of a short sale, the seller is the legal owner of the property. Like a ‘regular’ sale, the seller provides all statutory disclosures as well as all other info pertinent to the house. Think for instance information about the trees in the yard, the history of the house/remodels, just name it.

So yes, a short sale is a distressed sale in the sense that seller is not able to keep their financial commitments. However if you talk about the house itself: any sale can be a distressed sale. I see short sales that have been very well maintained and show pride of ownership and I see regular sales that have been very poorly maintained.

So next time you see a short sale: it’s like a regular sale with a seller contingency.