Taxes: This is a question anyone facing a short sale should ask their Realtor or tax advisor.
We’ve written about these taxes before, but once again here is the information we present to our San Diego real estate clients:
For Federal tax returns, the mortgage forgiveness debt relief on principal residences will remain in effect until at least December 31, 2013. Will it be extended? We don’t know.
For California tax returns and according to the California Franchise Tax Board, the debt forgiven on or after January 1, 2013 may still be excluded, but only if:Taxpayers were bankrupt when the discharge occurred (Title 11 discharge).
Taxpayers were insolvent (limited to level of insolvency).
Qualified farm indebtedness was canceled.
Debt was Qualified Real Property Business Indebtedness (QRPBI) and you make a federal election. The taxpayer cannot be a C corporation to use this exclusion.
If more than one of these exceptions applies, they are applied in the above order under Internal Revenue Code Section 108(a)(2).
(Our opinion? This sucks for distressed California homeowners. Most would not do a short sale if they were solvent and finances were in order. Some have been forced to move because of job or other necessities. Some have health issues. Some are just buried in debt and stress. Why would California lawmakers decide that its most financially stressed should bear the additional burden of being taxed on phantom income that doesn’t put food on the table or gas in the car?)
If you have questions or would like to discuss a possible short sale for your home, please feel free to give me a call at 877-818-8197 or 760-402-9101.–Roberta Murphy