The number of short sales in California and the Sacramento area are at their highest level since they started to be tracked. In January of this year, almost 24 percent of all sales in California were short sales. Although I don't have the share for Sacramento, since we have had a larger share of distressed homes, we can count on the percentage of short sales being higher than the state number. As I have reported before, short sales are growing in number because lenders have accepted them as a positive alternative to foreclosure and they have strong benefits for the homeowner who needs to sell a home which is worth less than what they current owe on their mortgage.
One of the most important benefits the homeowner receives when short selling their primary residence is the tax forgiveness provided under The Mortgage Debt Relief Act of 2007. Why should you care? Well if you're upside down on your mortgage and anticipate the possibility of having to short sell the property, 2012 is your last year for the debt relief on your primary home to be a non taxed event.
When a lender accepts a short sale, the amount of the mortgage which is not paid (the short amount) is reported to the IRS as income and subject to tax. The Mortgage Debt Relief Act of 2007 allows taxpayers to exclude this income through an exemption which means there are no taxes owed on the forgiven debt. More information and the exemption forms can be obtained on the IRS Website.
Losing the tax exemption as provided in The Mortgage Debt Relief Act will be significant if the debt forgiveness exemption expires. For example, if a lender receives proceeds from the short sale which is $100,000 less than owned they will report that amount as income. If the seller in the 25 percent tax bracket, additional income of $100,000 could end up owing an additional $25,000 in income taxes. In the Sacramento area where we had such a run up in valuations between 2000 €" 2005 it is not uncommon to see short sales with debt forgiveness in excess of $100,000.
The exemption may get extended but remember the first time homebuyer credit in 2010, which many people thought would be extended, was allowed to die. As bad as it sounds letting the Mortgage Relief Act expire will result in a revenue enhancement for the government during a time of need. We are advising our clients to assume it won't be extended and to act now if there is a need to sell a home which is worth less than the mortgage balance.
If you or someone you know is considering a short sale and have questions please feel free to call me at the MagnumOne Realty office in Roseville (916-290-9339) or send an email to juliej@jalone.com.