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The legal department of the California Association of Realtors has revised their handout on the taxation of foreclosures and short sales.

Here are the highlights (bold added):

1. If the lender chooses to foreclose using a trustee’s sale, then the lender waives the right to go after the borrower for the deficiency, despite the fact that the loan was a recourse debt.  In order to go after a deficiency judgement, the lender must go through a judicial foreclosure process.

2. Under the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) signed by the President on December 20, 2007, Internal Revenue Code 108(a)(1)(E) was added and provides that a taxpaper will not be taxed upon cancellation of debt income if the following conditions are met:

• The property sold in the short sale is the taxpayer’s principal residence, as that term is used in IRC 121.
• The cancellation of debt is Qualified Principal Residence Indebtedness, under IRC Section 163(h)(3)(B).
• The indebtedness is discharged after January1, 2007 and before January 1, 2013. (the end date was increased by three years from 2010 to 2013 pursuant to H.R. 1424, the Emergency Economic Stabilization Act of 2008).

Qualified Principal Residence Indebtedness is a loan secured by the residence used to acquire, construct, or substantially improve the residence.  The income relief is capped at $1,000,000 in case of a married person filing a separate return, and $2,000,000 for all others.

3. Recently passed California law, SB 1055, conforms California Revenue and Tax Code Section 17144.5 to federal law, with the following exceptions:

• The maximum amount of acquisition indebtedness is reduced to $800,000 for couples filing jointly, and $400,000 for individual filers;
• The maximum amount of debt relief income that can be forgiven is $250,000 for couples filing jointly, and $125,000 for individual filers; and
• California’s debt relief statute applies to property sold on or after January 1, 2007, and before January 1, 2009.

Finally, if the owner has owned the property for some time and had refinanced to take out some of the equity, the owner could be subject to capital gains taxation when selling the property as well.

Here is the complete copy from CAR: 

Questions and Answers of taxation on foreclosures and short sales

Posted on Sunday, October 19th, 2008 at 12:31 PM in Uncategorized | 4 Comments » |  Print You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.