IRS Update Good News for Santa Clarita Short Sellers

IRS Building

UPDATE 2021: It’s not often we receive any good news from the IRS, but this is one of them! Although the Mortgage Debt Forgiveness Act expired, there is now the Qualified Principal Residence Indebtedness Exclusion.

What is the Qualified Principal Residence Indebtedness Exclusion
If a mortgage lender forgives all or a portion of a borrower’s debt as a result of a loan mod, foreclosure, short sale, or deed in lieu, the I.R.S. generally includes the amount in the borrower’s gross income. So, the forgiven debt could result in tax liability.

However, as of December 31, 2020, if your forgiven mortgage debt qualifies for this exclusion, you can exclude up to $750,000 ($375,000 if married and filing separately). Before this date, taxpayers could exclude $2 million ($1 million if you’re married and filing separately).

Outdated Information Below

Even though the information below is outdated, when if comes to the economy, history has a way of repeating itself. Therefore, we will keep this post as it was originally published, below.

Original Post
In this original post we were pleased to share the following report from the California Association of Realtors regarding and IRS update and it was good news for Santa Clarita short sellers!

Distressed homeowners in Santa Clarita Valley and all of California, will continue to be safe from federal tax liability once the Mortgage Debt Forgiveness Act expires the end of 2013. One purpose of the Mortgage Debt Forgiveness Act was to protect distressed homeowners from having to pay taxes on the difference between what they owed on their mortgage loan, and what the lender received at the conclusion of a short sale. We’re very pleased and this IRS Update is Good News for Santa Clarita.

Many California and Santa Clarita Realtors, us included, have been concerned about what would happen with our distressed homeowners after they short sale their homes, once the Mortgage Debt Forgiveness Act expires on 12/31/13. Thankfully, our California Association of Realtors have been in contact with California State Senator Barbara Boxer, and we’ve received good news in a clarification letter Senator Boxer received from the IRS.

According to our CAR President, Kevin Brown, the IRS letter states 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.

We are now awaiting a similar action in a ruling from the California Franchise Tax Board, but they were holding off until the IRS responded. We fully expect the state to follow suit with a similar ruling, now that the IRS has paved the way!

We are NOT Attorneys or CPA’s
We must take this moment to remind our clients and visitors, at the Gregory Real Estate Group, we are real estate professionals and Certified Distressed Property Experts, but NOT attorneys or CPA’s. If you are a Santa Clarita homeowner considering a short sale we suggest you also consult with your tax professional and/or attorney before moving forward with a short sale transaction.

Matt Meray Gregory Realtors and Brokers
NAR Realtor Designations