Short Sale in CA, help with debt forgiveness CA law expiring

[hollycoffeebean]

I want to do a short sale on my home because I have been put into foreclosure.

The California law protecting me from being taxed on the remaining portion of the loan balance, after the short sale price is negotiated, has expired on Jan 1, 2010.

I still want to do this short sale as long as my buyer will put in the contract that this deal is only good if the lender (American Home Mortgage Servicing Inc.) agrees to forgive the remaining portion.

Say my balance is 500,000 and they can only get 200,000 in the short sale. I need to make sure that it definitely means the lender cannot fill out the form for California saying that they took the 300,000 loss and make me report it as income on my 2011 California state taxes, because I cannot afford that.

Is there an attorney who can just look over the contract for me and make sure I have the wording correct that protects me?

Thank you!
-Holly

 

[Zigner]

I want to do a short sale on my home because I have been put into foreclosure.

The California law protecting me from being taxed on the remaining portion of the loan balance, after the short sale price is negotiated, has expired on Jan 1, 2010.

I still want to do this short sale as long as my buyer will put in the contract that this deal is only good if the lender (American Home Mortgage Servicing Inc.) agrees to forgive the remaining portion.

Say my balance is 500,000 and they can only get 200,000 in the short sale. I need to make sure that it definitely means the lender cannot fill out the form for California saying that they took the 300,000 loss and make me report it as income on my 2011 California state taxes, because I cannot afford that.

Is there an attorney who can just look over the contract for me and make sure I have the wording correct that protects me?

Thank you!
-Holly

1) This is not an attorney referral site
2) It's not a choice on the lender's part.

 

[hollycoffeebean]

1) This is not an attorney referral site
2) It's not a choice on the lender's part.

1 - Sorry about that, I guess I'll accept any responses I can get if anyone knows if this is even possible?

2 - Do you mean that the lender can't choose to forgive the remaining portion of the balance, and then not report to CA that it took that loss?

 

[HomeGuru]

And would not the $300k be subject to Federal income taxes?

 

[hollycoffeebean]

And would not the $300k be subject to Federal income taxes?

No, the law did not expire for Federal... California let theirs expire.

The $300,000 would not be federally taxable, but it could be taxed by the State of California.

 

[Zigner]

No, the law did not expire for Federal... California let theirs expire.

The $300,000 would not be federally taxable, but it could be taxed by the State of California.

You may want to do a bit more research...

 

[hollycoffeebean]

You may want to do a bit more research...

I'm trying to. I came here for help.


I find all of this:

This is from the California Franchise Tax Board website: Mortgage Forgiveness Debt Relief



Mortgage Forgiveness Debt Relief



(Updated 2/19/2010) The federal Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.



For discharges occurring on or after January 1, 2009, California does not conform to the federal provision. Generally speaking, under the current law, the amount of debt discharged is taxable to California. However, several bills pending in the Legislature would extend and modify California mortgage forgiveness debt relief to conform more to the Federal law: AB 1779, SBX8 32, and SBX8 25.



But I'd like to know if I'm better off trying this, or walking away and letting them foreclose...

When you said I might want to do more research, did you mean that I was wrong about what I said, or that the people who help in these forums don't really know...

I'm just confused and trying to find help.

Thanks,
Holly

 

[tranquility]

The OP is correct. If this is a personal residence (aka "my home"), the debt forgiveness would generally be non-taxable, but the state does not conform and the amount would be taxable. However, you can't have a private contract which changes the reality of the amount of debt forgiven. Foreclosure or short sale shouldn't make any real difference.

Did you refinance the house?

 

[hollycoffeebean]

The OP is correct. If this is a personal residence (aka "my home"), the debt forgiveness would generally be non-taxable, but the state does not conform and the amount would be taxable. However, you can't have a private contract which changes the reality of the amount of debt forgiven. Foreclosure or short sale shouldn't make any real difference.

Did you refinance the house?

Thank you for your help.

No I wasn't able to re-finance because when I bought my home 3 years ago, it was 450,000. My loan amount is now 500,000 because it was a neg am. loan, but the prices of homes have gone down more than half, and now my home is only worth about 250,000 or less.

 

[tranquility]

I am uncertain as to if a reverse amortization is a "non-recourse" debt. Generally, purchase loans for personal residence in CA is a non-recourse debt. I would have to do some research to be sure. I think it unlikely that any amount above the original loan amount is not going to be for the "purchase", so don't think that portion would be treated the same way if the loan was a non-recourse.

Off the top of my head, without research, but just to guide you in your thinking process, I might think of treating the original purchase amount as a non-recourse (if true) and any amount above that as recourse.

If that is true, you will treat the amount realized as the Fair Market Value of the house, plus the amount of the debt forgiven (purchase loan amount) as the amount realized with your basis on schedule D along with the recourse portion as other income. In other words (assuming nothing down):

(On Schedule D) [amt realized] [Basis]
1099C forgiveness of debt (purchase amount) $200,000
Sale of personal residence $250,000 $450,000

On Schedule CA adjustments
Recourse amount 1099C $50,000

Which will give you an extra $50K in ordinary income for CA. (Are you insolvent?)

However, if the entire amount IS non-recourse, you will not have any cancellation of indebtedness income but a capital gain on your personal residence. (To be excluded appropriately.)

(On Schedule D) [amt realized] [Basis]
1099C forgiveness of debt (full amount) $250,000
Sale of personal residence $250,000 $450,000
Section 121 exclusion $50,000


But, since we're talking numbers, any tax advice in this message may not be used to avoid penalties or promote any tax related matter.

(I see the formatting didn't come through as I expected. Study it first, if you have a question what I'm talking about let me know.)