Am I required to pay tax on the difference of my short sale price and what I owe?

Asked by Andrew, Mountain View, CA Sat Oct 2, 2010

I'm looking to do a short sale on my primary residence, for $70k less than I owe. Am I required to pay tax on this difference in the state of california?

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Marcy Moyer, Agent, San Ramon, CA
Sat Oct 2, 2010
I am not an attorney or an accountant and you should speak to one about your particular case. However, in broad terms, homeowners who short sell before 2012 owner occupied properties are generally not taxed on the amount forgiven. That many not be true in all cases, especially if there was a cash out refinance, so check with a professional. As far as Ca. goes, they did not adopt the same exclusion. However, I have heard that if you are insolvent you may get excused from the tax. Since you generally have to be insolvent to get a short sale approved that may apply. You can go to the San Mateo, and possibly Santa Clara County Bar Association and make a half hour appointment with a lawyer for $25. I would highly recomend this.
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Gilbert Rich…, , Santa Clara County, CA
Sat Oct 2, 2010
It depends. Ask your CPA because if it is owner occupied, and if it was a purchase money loan there shouldn't be an issue. But being that they are changing tax regulations on a regular basis regarding short sales I can shoot you over some information and let you know for sure.
1 vote
Ron Rovtar, Agent, Boulder, CO
Sat Oct 2, 2010
Hi Andrew:

The biggest potential tax issue would usually arise from your Federal Income Tax. Generally speaking, the feds have given owners in your predicament a temporary reprieve from such taxes under the Mortgage Debt Relief Act of 2007. The act is effective until 2012. You should talk to an attorney to see if you qualify! See the link below for more information. You also should check with California tax authorities to see if you will owe a state tax.

Ron Rovtar
1 vote
RonS, , Concord, CA
Fri May 9, 2014
Not necessarily. While the Mortgage Debt Foregiveness Relief Act expired at the end of 2013 and has not been resigned or extended as of this writing, you may still escape taxation of you meet the insolvency test with the IRS (See IRS form 4681). Note that you may still be subject to state taxation even if you meet the federal guidelines.

As always, consult your tax professional as the opinions on this forum are just that.
0 votes
Kim Benedict, Agent, Overland Park, KS
Fri May 9, 2014
Yes you are, it is looked at as income... I have just completed a certification for short sales and foreclosures, and it is tacked on as income.
0 votes
Leili Mortaz, Agent, Campbell, CA
Fri Apr 26, 2013

We have a pending Short Sale with 2 loans on it and they sellers have been advised by the CPA that the Forgiven Debt would not be subject to Federal Taxes since the Debt Relief act was extended for 2013. The State of California also does not require taxes on homes purchased prior to 2012.

But as most of the folks have advised you should talk to a CPA or a Real Estate Attorney. Also, you have other resources if you do NOT have access to a CPA or an attorney. Your bank's Loss Mitigation department will advise you to contact a HUD counselor by calling 1-888-995-HOPE. There is also some very good information on HUD's website below on the lenders who participated with the 25 Billion dollar Servicing Settlement. It would be wise for you to make sure if your lender participated in this settlement.

Finally, in 2012, a Consumer Finance Protection agency was created to help consumers and they also have a lot of helpful information for home owners in distress. I have inclued their website address below as well.

Good luck.
0 votes
Bay_area_ll, Home Buyer, Oakland, CA
Mon Nov 1, 2010
no taxes owed thanks to realtors lobbying for tax forgiveness on unpaid debt.

You are now free to walk away from your home with minimal consequences.
0 votes
Ruth and Per…, Agent, Los Gatos, CA
Sat Oct 16, 2010
Hi Andrew

Regert to hear about your problem.

Here are 2 blogs that should be helpful, however, you must get in touch with a CPA or a Lawyer
who handles such situations and its very important for your Agent to seek waivers from the bank too
for the discharge of debt.……

A lot depends on whether it is a home equity line or purchase money, have you refinanced.

If you need further help do call me.

Good luck.
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0 votes
Craig Brezina, , Naples, FL
Sat Oct 2, 2010
The best thing to do here is talk with an attorney familiar with real estate law in your area. Banks will sometimes also try to get a deficiency judgment against you as well so be sure to consult a professional regarding all consequences associated with your short sale.
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0 votes
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