The DesertSmith Group

47060 Washington St. #5101
La Quinta, CA 92253
Robin's Cell: (760) 501-7989
Randy's Cell: (760) 408-8369
Robin@DesertSmith.com
Randy@DesertSmith.com

 

Let the Short Sales Continue!!

While short sales and starting to fall out of favor with the banks as an option for homeowners in distress, those who have recently gone through a short sale (or are going through one now) just got some good news from the California Franchise Tax Board. The IRS and the California FTB had been operating under the federal Mortgage Forgiveness Debt Relief Act of 2007 which was set to expire at the end of 2013 and the similar California law that had already expired at the end of 2012 which stated that forgiven debt that resulted from a short sale would not be considered ordinary income for tax purposes.

The FTB has ruled that the “phantom income” created by debt forgiveness is not subject to state income tax liability.

As California is generally a “non-recourse” state, (meaning that a lender cannot take action against a borrower for the forgiven debt in a short sale transaction) now the “under-water” homeowner will walk away with only a damaged credit rating once an investor has agreed to accept a short pay as payment in full for an obligation.

The IRS has already adopted this doctrine. The great news is that going forward, California homeowners who are able to get an approved short sale on their property will not have to worry about being taxed on debt that was forgiven by their lending institution. This would have not been the case had these acts had simply been allowed to lapse.