Sacramento Short Sales Mortgage Debt Relief IRS Letter

bigstock_Short_Sale_Real_Estate_Sign_An_7360545-300x207Sacramento sellers who expect to close on a short sale in 2014 have a very good reason to send flowers to Sen. Barbara Boxer and, while they’re at it, maybe C.A.R. as well. I received the best news this morning, which I can’t wait to share with everyone because it’s about mortgage debt relief. Taxation on mortgage debt relief has been on the tongue of every single short sale seller I have talked to who might have to close escrow next year.

In a nutshell, we have no worries about federal taxation on mortgage debt relief resulting from most closed short sales in California from here on out. Other states, they probably have cause for concern, but not California. What makes California so special apart from our sunny weather, smog-hidden mountains and polluted oceans, and let’s not forget Cal Worthington? We’ve got California Civil Code 580e, resulting from the passing several years ago of SB 458.

Under ordinary circumstances, the federal tax code says if a person has had debt canceled, the amount that was forgiven is subject to taxation. However, in 2007, the Mortgage Debt Forgiveness Act passed that says taxation on canceled debt does not apply to a short sale, subject to certain criteria. Every year, the mortgage debt relief protection has expired and every year the federal government has extended it. This year, it’s not yet been extended because our lovely legislators continue to wrap in the mortgage debt relief extension with other legislation that won’t get passed even if they lined up every legislator against the wall, blindfolded them and threatened to shoot them all at will.

This political game has caused short sale sellers in Sacramento extraordinary grief and stress. Many of my sellers have called to say they don’t know what they will do if we can’t close their short sale by December 31st, 2013, when the federal mortgage debt relief protection expires.

However, the argument brought forth to the I.R.S. by Sen. Barbara Boxer, with C.A.R.’s assistance, is that sellers are released from personal liability in a short sale under California Civil Code 580e, and that makes short sales non-recourse, so why should a seller be subject to federal taxation on top of it? The I.R.S. agreed and issued a letter that said California short sales protected by our California Civil Code 580e are not subject to federal taxation for mortgage debt relief. This is huge!

C.A.R. and Sen. Barbara Boxer are working on a similar letter from the state of California, which is expected to follow suit.

 

Elizabeth Weintraub

About Elizabeth Weintraub

40+ years of experience in real estate, Sacramento real estate broker working at Lyon Real Estate in Midtown Sacramento. Author of The Short Sale Savior. Home Buying Expert at About.com. Top Producer, ranks in the top 1% of all real estate agents in Sacramento Region. Life Member of Master's Club awarded by Sacramento Association of REALTORS.
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  • Sidney Kutchuk

    Wow! I am so happy I can across your post. I have helped many CA homeowners get through the short sale process and have been waiting to hear some good news on tax relief for them.

  • http://elizabethweintraub.com Elizabeth Weintraub

    Glad to help spread the news, Sidney! I immediately emailed all of my existing short sale sellers when I heard about it because everybody was concerned. It’s bad enough to have to go through a short sale and lose your home, sellers should not be taxed on top of it, and I’m thrilled the government FINALLY agrees.

  • Sidney Kutchuk

    Do you have a link to the letter from the IRS?

  • http://elizabethweintraub.com Elizabeth Weintraub