Last fall, the IRS and the state Franchise Tax Board issued letters stating that California families who have sold their home in a short sale are not subject to either state or federal income tax on the forgiven debt. Recently, the IRS, claiming that its original letter had been “too broad,” issued another letter to clarify that under some circumstances (e.g., cash out equity lines) the debt forgiven in a short sale is still taxable. Homeowners who have sold their home in a short sale are strongly urged to consult with a tax professional to determine what, if any, tax they owe.
In a short sale, homeowners sell their homes for less than what is owed. If a lender agrees to the sale, the lender is forgiving a certain amount of the loan principal. Before these clarifications it was not entirely clear that homeowners wouldn’t lose their homes and then be faced with a large tax bill as well.
If you are in the Los Angeles region, have any questions or real estate sales or financing needs, feel free in contacting me.
Ron Henderson GRI, RECS, CIAS
Multi Real Estate Services, Inc
Gov’t Affairs Chair – California Association of Mortgage Professionals
Real Estate market, Mortgage rates, Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley