Tax Implications For Short Sale In CA

Hello,  my client owned a condo lived in it for 6 years.  It was her primary residence.  Then 2 years ago she bought a home and moved out of the condo into the new home.  She was unable to sell the condo since the values have dropped so much.  She put tenants in that condo.  In the last year my clients business is down and she can't afford 2 places.  Values are still down and her only option is to short sale the condo.  Is my client going to get taxed on this sale?  Any one have info or the name of a good current account?

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Permalink Reply by Short Sale Superstars LLC on April 14, 2013 at 10:47am

Kristine,

       Please be advised that I am not a CPA and that this should not be construed as tax advice. It's a good question since it was their primary residence for many years and now it's an investment property, I'm not sure how that would effect the tax situation. But from my understanding if it's an investment property the borrower will receive a 1099 for the difference and I believe they are held liable for it. Definitely a question for a CPA. Wish I had a good referral for you, I'm looking for a new one myself!

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Permalink Reply by Simon Campbell on April 15, 2013 at 1:24am

On January 1st, Congress signed the H.R. 8, the American Taxpayer Relief Act of 2012. The mortgage cancellation relief for home owners or sellers who have a portion of their mortgage debt forgiven by their lender, typically in a short sale, foreclosure sale or loan modification is extended through 2013.

Additionally, deductions for mortgage interest, mortgage insurance premiums and state and local property taxes, are extended. The exclusion from capital gains with the cap at $500,000 ($250,000 for individuals) remains in effect (subject to limitations).

What does that mean for your client? If they short sell, there will be no IRS tax ramifications. There will be a hit on her credit however. But, if she can continue to make the payments on the mortgage, then the hit will not be as hard.

Permalink Reply by Wayne Brooks on April 15, 2013 at 5:50am

Simon, not exactly.  Once the property was rented, a short sale of that property no longer qualifies for MDRA relief for a Primary residence.  Find a CPA for this advice, and also relief under Insolvency rules, Form 982, and CA state income tax reg.s.

Permalink Reply by Wayne Brooks on April 15, 2013 at 7:05am

Another reason you need a CPA;  I read differing opinions as to whether forgiven debt on "non-recourse" loans is a taxable event.  When I read the actual IRS literature, I read that forgiven non recourse debt is Not a taxable event.  Other more knowledgable people than me, firmly believe the non-recourse factor is irrelevant, and therefore it Is a taxable event.  We almost never deal with non-recourse loans for residential debt here.

Permalink Reply by Kevin - Greenville, SC on April 15, 2013 at 7:12am
Permalink Reply by Kristine Halverson on April 15, 2013 at 9:59am

Thank you for all your info.  It appears as if this does need the skills of a savvy accountant well versed in the MDRA.  If we ever found one they would make a lot of $$.  There are so many people needing this type of relief.  The issue is whether it's a primary residence or not and is it a non-recourse loan.  Any other input or experience you want to share its greatly appreciated.  You are the BEST!  Kristine

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