What is a Short Sale?

A short sale occurs when the lender accepts less of the mortgage balance than the total amount that is due. If your mortgage is $150,000, but your home is worth, $95,000 you are $55,000 short, not including costs to close the sale such as real estate commissions, recording fees or title and escrow charges.

Sometimes, to avoid going through the costs of foreclosure, a lender will accept a short sale transaction by letting a qualified buyer purchase the home for less than the mortgage balance. The loan "not necessarily" need to be in default, but there are several restrictions that a lender will apply before accepting a short sell.

A real estate is not licensed as a lawyer nor a CPA and cannot advise on the consequences. Except for certain conditions pursuant to the Mortgage Forgiveness Debt Relief Act of 2007.  Note: the I.R.S. could consider debt forgiveness as income, and there is no guarantee that a lender who accepts a short sale will not legally pursue a borrower for the difference between the amount owed and the amount paid (aka Deficiency). Only a lawyer or Certified Accountant can determine whether your loan qualifies for a deficiency judgment or claim.

However, here are some things you should know that can help you in deciding if doing a "short Sell' is right for you. As a Licensed Realtor, I can assist you with pursuing the short sell by helping you to better understand your options, along with listing, marketing and locating prospective buyers.

Qualifications for a Short Sale

Consider the following information before starting a short sell. In many cases, you may not qualify·

1. Has your Home's Value Dropped? Local comparable property home sales can help determine what your value is in relationship to what is owed the lender. We will help you in determining this information, but ultimately the lender's valuation will be what's used in setting the short sell price.

2. Is the Mortgage in Default? Contrary to most beliefs, your mortgage does not need to be in default for a lender to consider accepting a short sell offer. However, being behind on payments is a primary reason for seeking a short sell, in effort to resolve the matter before reaching foreclosure. 

3. Do you have a Hardship affecting your Finances? The requires that you provide a written explanation of your hardship, including why you can't pay the Deficiency and why you soon will be unable to continue making the payments. 

Taxation After a Short Sale

A primary residence is exempt from mortgage debt relief, according to the Mortgage Forgiveness Debt Relief Act of 2007, which expires December 2012. Some states will still tax you unless you qualify for an exemption.

The Mortgage 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, qualifies for the relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.

 If you think a Short Sell is best for you, Contact Me Today.

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