Short Sale Tax Implications SB 458 An important consideration with respect to foreclosure and shortsale taxation is whether the debt is “recourse” or “nonrecourse.” In the case of recourse debt, the debtor is personally liable. If the debt is nonrecourse, it is secured only by the property and the debtor is not personally liable for any balance. You should consult with an attorney or tax professional to determine the status of your mortgage, but in California, mortgages that are used to purchase a residence are nonrecourse, but mortgages resulting from a refinance loan are typically recourse. More specifically, secondary liens from a refinance are considered recourse loans. When a recourse mortgage is foreclosed, the debt is only satisfied up to the sales price of the property. If the lender forgives the balance of the mortgage, there is cancellation of debt income, which could be taxed as ordinary income. Moreover, if the property was encumbered by a second mortgage obtained through a refinance, recourse applies and the homeowner could be sued for the balance due. Although Gov. Jerry Brown sign SB 458 into law as of July 15, 2011, the bill does not pertain to foreclosures. Given the fact that the vast majority of distressed homeowners have at some point refinanced their homes, a subordinate lien established with a refinance will be subject to recourse in the event of foreclosure. SB 458 effectively prevents secondary lender recourse in a short sale, but does not provide this same protection with a foreclosure. Because of this, distressed homeowners should have their mortgage situation fully evaluated prior to opting for foreclosure. Today there are numerous alternatives to foreclosure and the tax implications of a shortsale may not be anywhere near as significant as one may assume. We invite you to contact our office to become fully educated and understand short sale tax law prior to making a decision. Gov. signs SB 458 into Law |
Realtor®,Short Sale Specialist, Foreclosure Alternatives
